Question 1

Why is my profit margin becoming thinner as we scale?

Accepted Answer

When you increase ad spend, it's common to see an increase in your CPL or a decrease in your ROAS. Here's why.

Increasing our ad spend means we are targeting a larger audience. These are people who aren’t ready to buy––and it takes more clicks and longer time to convert them.

Simultaneously, we are competing with big players who have enough money to over-bid on keywords. This brings our CPC up.

The more we expand the audience size, the less certain Google’s algorithm will be when they show an ad. That’s because we’re pushing the algorithm to go into uncharted territory––it doesn’t know who to target yet.

If our low-hanging-fruits are composed of only a small portion of our audience, it’s hard for Google’s algorithm to determine who will go for the click.

So we need to warm up our audience and add “brand awareness” strategies until the top-of-the-funnel audience gains familiarity with our brand.

For example, we can run a display ad that targets a proactive (not remarketed) audience. This might not get many clicks but we’ll get views that can increase our brand awareness.

How do we spend more without diminishing profit margin (i.e. lowering ROAS or increasing CPL)?

It is nearly impossible to increase your budget without thinning your profit margin, at least for a short time.

To balance it, we recommend temporarily “leaning out” your account when trying to scale. This helps you preserve your profit margin while waiting for the algorithm to adjust to a higher ad spend.

Here are a few of ways to do that:

Pause brand awareness campaigns like video shopping
Scale back brand campaigns by reducing budget and or changing bids
Find brand keywords that are taking money in the other search campaigns

When a campaign isn’t limited by budget, we can often increase the spend without lowering ROAS by much at all.

But what if your account has maxed out its spend and reached its entire market/audience?

Use lower-spend outbound campaigns. These are campaigns like YouTube or Display that help increase your brand awareness and introduce your offer to a new audience.

Start running these campaigns with a lower budget and analyze how they affect your overall campaign performance.

You will sacrifice your ROAS with these new outbound campaigns. So it’s best to keep the ad spend low in the beginning.

As a result, your main campaign conversion driver should become more active.

You’ll be able to increase your outbound campaigns’ budget incrementally.

Question 2

What does "Proven ROAS" mean?

Accepted Answer

A campaign that has proven ROAS means that it’s ROAS is or was at whatever number you need it to be at in order to make a profit.

For example, a 100% ROAS means you spend $1 on ads and get $1 back.

This is never a large enough number because the business will undoubtedly have other expenses beyond just ad spend, so this campaign has not proven it’s ROAS.

400% ROAS is a general rule of thumb for the minimum number you should be aiming for if the business doesn’t know it’s exact costs & you therefore can’t calculate an exact ROAS metric.

This is because 400% lets you break even if the business has a 25% profit margin. You get to make at least 4x your money back to break even. If you want to cover an agency fee, then they’ll have to get to 450% ish.

Find current ROAS: All conversion value / cost

Find minimum, break-even ROAS: If 60% profit margin, figure out how many times 60% goes into 100% (60/100 = 1.7). Then, add two zeros to turn that into a percent and you get 160% break-even ROAS.

***Pro tip: If you are an e-commerce company, set up a custom column in Google Ads to display ROAS in a % format (fyi, if you don’t set this column up, you can look at “conversion value/cost” column which gives you the same ROAS number but in decimal format).

Why is my profit margin becoming thinner as we scale?

What does "Proven ROAS" mean?

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