My ROAS is over 600% and Iâ€™m Losing Money?!!
I’ve been on the prowl lately for a CPA/ROAS calculator to determine the profitability of my PPC accounts. The main problem that I run into is that most of the free CPA/ROAS tools out there don’t consider all of the factors that I’m interested in evaluating when setting CPA & ROAS goals.
For example, let’s say that I arbitrarily decide that anything over a 600% is good enough for me because it most likely means I’m making boat loads of money. Unfortunately, that’s not always the case. Check out the little test I performed below.
Let’s say I have an e-commerce campaign with the following stats:
Conversion Rate: 9.55%
Avg. CPC: $0.90
Avg. Sale: $57
Profit Margin: 10%
Upon first glance, it appears that this campaign is doing well. The main indication is the 612% ROAS. Let’s see how well the campaign is actually doing when profit margins are factored into the evaluation.
This calculator just kicked my ROAS’s butt. With a 10% profit margin, my actual ROI is -39%. So instead of making $6.12 on every $1 I spend, as my ROAS lead me to believe, I’m actually losing my $1 investment as well as an additional $0.39 on that dollar. Yikes! At least now I know that in order to break even, I’m going to need to decrease by CPA to about $5.74.
The ROI calculator above inspired me to make my own calculators to measure performance at the account and campaign levels since I’ll be using it quite often now to measure profitability.
Even though I don’t consider operating overhead at the campaign level, I don’t want to ignore it entirely. Often times, account owners will want to know how profitable their accounts are when both advertising cost and the agency management fee are factored in. Monthly management fees tend to be somewhere between 10-20% of monthly total online spend. To keep it simple, let’s jump right in the middle at 15%. So in this case, the operating expense is the monthly management fee.
Below are performance stats at the account level over a one month period, along with the 15% monthly agency fee:
So, overall the account is profitable.
Here is how the calculator works:
The orange fields are input fields.
Cost of Goods sold: For this particular account, the average profit margin is 28%. So COGS sold in this example is 72% of total revenue, or (0.72*$59,118.50) =$42,565.
Operating Expense: In this example, we assumed a monthly fee equal to 15% of spend, or (0.15*$6,541.12) =$981.15
Break-Even CPA: (Profit after advertising/Conversions)-(Advertising Cost/Conversions). Or, ($59,118.50-$42,565.32-$981.17-$6,541.12)/922)-($6,541.12/922)=$16.89
Actual ROI: (Profit after advertising/Advertising cost), or ($9,030.89/$6,541.12)=138%
After all of the monthly costs, my client ended up making $9,012.06. Woo hoo!
This calculator is still a bit of a work in progress so if you see any formulas that should be tweaked, please don’t hesitate to leave a comment!