How Do You Establish an AdWords ROAS or COS Target?

What is an AdWords ROAS or COS and how do you establish your targets Roy?

I'd start with an overall picture of how much of your top-line revenue you've spent on advertising in the past, at a P&L level.  Then, a COS target is going to be a function of your Unpaid/Paid traffic ratio, and your attribution overlap.  Those two figures are available from Google Analytics, though, so if you know what you've been spending overall (or need to be spending, if profitability hasn't been where you need it).

Basically, you want Advertising to fit between your Gross Margin, and your other SG&As, so that you cover all of your fixed expenses, and reach your profit goals.  If you've been happily profitable over the past, then stick with a higher COS to press your advantage.  If not, then you'll want to back into a new target number.  The COS of paid channels are, by definition, subsidized in part by unpaid traffic (organic, especially), so your company's Advertising line is going to be less than the COS target for a channel.

For example, if a company had a 50/50 unpaid-to-paid split of traffic, and their P&L's advertising target was 10%, then their channels would be targeting a COS of 20% (excluding attribution, for now), as the other half of the traffic is coming in at a COS of 0%, which would net out to 10%--right on target.

So, here are the basic steps:

  • See if you can determine how much you've spent, overall, on advertising in the recent past (at least a few months average).
  • Determine if that performance was sufficiently profitable.  If not, how much was the overrun, as a percent?  Bias the target down by that ratio.  If it was happily profitable, carry on with that number.
  • With those, you should be able to determine a company-wide Advertising target budget, as a percent of revenue.