Hey friends, in today's email we will be discussing:

Optimize your campaigns: Why moving away from CPA and ROAS is the right step.

Mastering Google Ads: The Strategic Move from ROAS to CLV Optimization

I talked with our Google Ads account manager a couple of weeks ago. During this conversation, I wanted more information about optimizing our campaigns on customer lifetime value (CLV), instead of ROAS. The reason for this is the fact that when you optimize towards CLV, you will be able to spend more money now, as you will earn it back later.

Let me explain.

As for everybody else, most of my clients and previous employers have optimized their campaigns for ROAS (Return Over Ad Spend) or CPA (Cost Per Action). When you’re optimizing towards a CPA target, you’re being told how much money you can spend for a conversion.

Imagine you’d be selling over 1,000 different products. These products have a price range from $50 to $500. This is a big range. When you’re optimizing towards a CPA target, you will look at the average cost you can make for a conversion. However, this means that your campaign will also look for the cheapest type of conversion. This could mean that the algorithm is optimizing towards the cheaper products, as these are most likely, easier to sell.

When you change your optimization to ROAS, a big change will be made in Google Ads. The system will no longer just look at the cheapest CPA, it will look at the best return your campaign can get from a potential customer. This could mean that your campaign is optimizing towards the more expensive products, instead of just finding the cheapest product.

You no longer look at the average CPA, but you look at the return that you can get from your campaign.

There is one big caveat with optimizing towards ROAS. The big problem with ROAS is that it is optimizing towards the return. However, there can be products that generate almost no margin. If for example, you’re selling 2 different products. A $500 product with $50 margin, and a $250 product where you’d make $75. This would mean that you’d prefer to sell the $250 product over the $500 product. However, your ROAS bid strategy won’t know this. It’ll try and sell the higher valued product to get a higher ROAS.

That is the downside of working with the ROAS bid strategy. To solve this, you could start optimizing your campaigns towards margin (or profit). Instead of giving Google Ads the revenue from your product, you’d give the margin that you’re making. This would solve the issue we described above. Now your campaign will try and sell the $250 product over the $500 product, as you’d be making more money from this product.

If you’d like to take it to the next level, you could start focussing on CLV. This metric will look at the total money you will be expecting to make after selling a product. Let’s say that the $500 product gets people to come back more often for another purchase. The $250 product might make you more money by selling it, but customers don’t like the product and won’t come back after.

In the end, it's not easy to move from CPA to CLV. The main reason for this is that you need other people in the organization to understand the benefits. Then you also need to make sure you have the right team around you to get this done (developers, data analysts, etc).

Podcast episode(s) you'd love

• ​Think Fast, Talk Smart: Best of: How to Take Risks in Your Communication, Relationships, and Career. An interesting conversation with Dan Pink, who emphasizes the 'why' instead of the 'how' to inspire others.

Found any interesting articles yourself? Please share it with me, as I am always interested in learning something new.

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