If there’s a theme to the 21 Secret Truths, it may be that almost nothing in paid search is what it appears.
Keywords aren’t what you’re trying to optimize, ad groups aren’t for organizing keywords, campaigns aren’t for organizing ad groups, bids don’t determine how much you pay, and so on. So perhaps by now it won’t surprise you to learn that the profit reported by paid search often isn’t real either.
When Making Money Isn’t Enough
The idea of spending $1 and getting back $3 sounds great. If we take in more than we put out, our business is profitable. Everyone knows that.
But as with all the other little-white-confusions, the definitions of ‘cost’ and ‘revenue’ used in the common language of PPC are incomplete and inaccurate.
The trouble is that AdWords, GA, Yahoo, Ad Center, and many other tools have no mechanism for including the cost of goods (or cost of sales) in their reports and calculations. They report Gross Profit, and Gross Return – which they call return-on-ad-spend or ROAS. (Although Google does sometimes stretch and literally call this number ‘profit’.)
ROAS is a ‘better than nothing’ metric. But ROI, a true Net Profit based return calculation is vastly superior and more accurate. Anyone managing substantial paid search programs for products or services that don’t have a flat cost shouldn’t settle for ROAS.
How ROAS Lies
The trouble with ROAS isn’t just that it gives the false or increased appearance of success. It shows positive numbers that should be negative, and high positive numbers where there should be low ones – that is true.
But for most businesses margin levels aren’t consistent. Some products or services are marked up 20% while others 80%. This means that all ROAS numbers aren’t off by the same percentage, so you can’t just adjust them in your head. And even if you know specific or approximate margins by product category, you can’t be sure which keyword drive which item sales. Very often the keyword ‘little black dress’ leads to the sales of shoes along with or instead of the dress.
Looking at ROAS vs ROI at the query, keyword, ad group, or campaign level always leaves a vastly different impression and lead to very different decision making and prioritization.
There are many data elements we use in PPC that should or could be improved, but betterness (I made that word up) is beyond our control. Accepting ROAS is voluntary and generally unwise.
It should be noted, if it isn’t obvious, that there are some businesses for whom ROAS is functionally equal to ROI, and therefore the ROAS problem doesn’t exist. Pure lead-gen with a single type of conversion is one example since there is functionally no cost-of-goods. There are others. So if in your business the gross profit is the net profit (at least excluding fixed cost and overhead which is generally not considered in the ROI calculation, this topic doesn’t apply.