March 29, 2022

What You Should Know About Return on Ad Spend (ROAS)

A lot goes into launching a successful digital marketing campaign. Marketers must analyze large amounts of data and perform numerous calculations to understand a campaign’s success, and these processes must be repeated for every campaign after that. In addition, there are dozens of key performance metrics to track, from click-through rates to customer acquisition costs. It’s a lot to handle, and it can quickly get overwhelming. Among all of these KPIs, one metric stands above the rest as the clear and concise way to measure a campaign’s efficacy: Return on ad spend.

Return on ad spend (ROAS) helps marketers determine the overall success of their advertising campaigns from a revenue perspective. It allows marketers to see how much revenue their campaigns generate compared to costs, and it does this all in real-time. In other words, ROAS helps marketers determine whether their campaigns are moving the needle or need adjustments. In this article, we’ll dive deeper into ROAS and provide tips on how you can quickly calculate and increase your campaign ROAS.

What Is Return on Ad Spend (ROAS)?

ROAS presents the revenue generated for every dollar spent on a campaign. Commonly expressed as a ratio, such as 10:1, 5:1, or another figure, it’s similar to an ROI calculation. However, ROAS focuses only on the revenue return from a specific ad or marketing campaign. At the same time, a ROAS calculation is flexible and capable of being applied to several campaigns as needed. This means it’s just as useful for looking at the return from an influencer post as it is for email campaigns for an entire quarter.

That being said, ROAS isn’t as granular as calculating costs per conversion, click-through rates, or other more focused metrics. Instead, it provides a comprehensive view of a specific campaign’s success, though not on the same level as ROI.

Why Should You Calculate ROAS?

If your campaign’s goal is to generate revenue, calculating ROAS is a must. ROAS is uniquely useful, as it helps you understand if your advertising efforts are actually generating revenue compared to what you spend on the campaign. In other words, it works to complement other performance metrics and data to ensure you make the best decisions for your campaign’s success.

Once you’ve calculated ROAS, you can do various things to help maximize your campaign’s results. For starters, you can shuffle ad dollars around to boost your ROAS, but there are plenty of other actions too. For example, ROAS can help you improve the ads themselves. You can run A/B tests on your ads to see which perform better, and you can repeat this process until you improve your results. At the same time, ROAS calculations can easily help you optimize your website’s landing pages, product pages, or even your sales funnel. For example, if you’re seeing a solid click-through rate, but your ROAS is lower than you’d like, it might mean your landing page isn’t optimized for conversions. Shoppers might click away shortly after arriving on your landing page, which explains your low ROAS. Using this information, you can update the page to appeal more to the people clicking on your ads. Or, maybe shoppers are clicking through your product pages but leaving before buying anything. This might indicate your prices are too high or that your product pages need an update to their images or copy to better entice visitors to make a purchase. Your ROAS can help you optimize your digital marketing efforts in many ways, which is why every marketer should calculate it along with other performance metrics.

ROAS vs. Return on Investment (ROI)

Although they might seem similar, there are a few major differences between ROAS and ROI. To start, ROAS looks at revenue rather than profit, represented by the following formula:

ROAS = revenue generated from ads / cost of ads 

On top of this, ROAS only considers direct spend, rather than the other costs associated with an online campaign. This means that ROAS is the best metric to use when you need to determine whether your ads are effectively generating clicks, impressions, and revenue.

Conversely, ROI offers your business a bigger picture, measuring the overall return on investment and represented by the formula below:

ROI = net profit / net spend

This means that ROI is focused more on profit, helping your business determine whether or not an ad campaign is actually benefiting the business overall. This means that if you’re trying to calculate your advertising cost, you’d want to look at your ROAS. If you’re instead trying to determine whether your investment made a profit for the business, you’d need to look at your ROI.

To give an example of ROAS vs. ROI in practice, let’s suppose you run an eCommerce company for baby products and you’re eager to see if your PPC and baby products digital marketing efforts have been paying off. You pull up the numbers and see that while your company has made $100,000 in revenue, you’re also spending $25,000 in ads. In addition, the costs of software, people, and production come out to around $80,000. In this scenario, you’d want to use the ROAS and ROI formulas to determine how effective your ad campaigns truly are. Here’s what that scenario looks like on paper:

ROAS = ($100,000 / $25,000) x 100 = 400%

ROI = (-$5000 / $105,000) x 100 = -4.76%

If you’re only looking at ROAS, then the above example might look as though your ad campaign is pretty effective. After all, that 400% looks pretty positive. However, looking closely at the ROI reveals that the campaign isn’t making your company any money at all. In fact, it’s putting the company at a loss. This is why it’s crucial to stay on top of both your ROI and ROAS. Fail to do so, and you run the risk of investing a considerable amount of money into a campaign that does nothing but generate a loss for your company. In contrast, you might also discover that a campaign you thought was cost-effective isn’t really capturing a meaningful amount of clicks and impressions in the long run.

How Do I Calculate ROAS?

Naturally, the goal of any ad campaign will be to generate a positive return on ad spend. However, that begs the question of what that return should be and how to calculate it. If the formula for ROAS is Revenue Generated By Ads / The Cost of Ads, then it shouldn’t be too difficult to divide revenue by the amount of money spent on a specific ad or marketing campaign.

Your ROAS is:

To go back to our earlier example, let’s suppose your eCommerce company spent $1,000 on a Facebook ad campaign for your latest baby products. This campaign generated $10,000 in revenue, so plugging those numbers into our ROAS formula gives us a ROAS of 10:1. This equates to $10 in revenue for every $1 spent. It’s a simplified take, but it’s a solid ROAS by all accounts.

That being said, it’s important to remember that there are often other costs to any campaign, up to and including any money paid to an ad agency, pay to designers, money used to bid on keywords or any other money put towards a PPC campaign. Additionally, you need to consider a few other hidden costs, such as vendor costs, the salary costs of in-house employees working on your campaign, and the overhead from software costs or equipment and apps used for the campaign. At the end of the day, you want to make sure your numbers are as accurate as possible, ensuring your calculations provide the most up-to-date information regarding the effectiveness of your ad campaigns.

What Is a Good ROAS?

If you’re calculating ROAS for the first time, you might be wondering if there’s a “good ROAS” to shoot for. The answer will depend on your business, your goals, your budget, and other factors, however, a higher ROAS is generally preferred. While most businesses typically shoot for a 4:1 or greater ROAS, aka $4+ for every $1 spent, there’s no one-size-fits-all expectation. It will vary from business to business or even campaign to campaign.

For example, if your campaign goal is to raise awareness or build a following, you can likely expect a low ROAS, and it shouldn’t bother you. After all, plenty of people are still seeing your ad and becoming more aware of your products or services each time. On top of that, ROAS isn’t really a standalone statistic. It’s simply an indicator of how effective your campaign is. If you find that your ROAS is low, you can always dig into your other stats to determine why and plan to improve it.

How Can I Improve My ROAS?

As for improving your ROAS, try and remember that a low ROAS doesn’t necessarily mean that your ad or marketing campaign is a failure or that you need to start from scratch. You might only need to do some tweaking to your campaign. That being said, here are a few relatively easy-to-implement tips for improving your ROAS.

Make Your Website More Mobile-Friendly

It’s no secret that we live in a mobile-first environment. More people are shopping on their smartphones and tablets than ever before, and recent statistics show that up to 70% of web traffic comes from mobile devices. In short, it’s never been more important to ensure your website is mobile-friendly. After all, it doesn’t matter how engaging your PPC ads are if your website can’t deliver a mobile experience that converts. The last thing you want is to pay for clicks that don’t provide any meaningful return.

Thankfully, there are a number of ways you can improve the mobile-friendliness of your website. The bulk of which fall under general guidelines for optimizing your website from the ground up. Start by checking your page and site load speeds, making sure they fall within user-friendly parameters (less than 3 seconds). From there, you might consider looking into location services to deliver personalized content, doing a quality pass on your website content, images, and product pages, and streamlining your checkout process to reduce cart abandonment. It’s a gradual process, but one that’ll benefit your business in the long run as more customers find it easier to surf and shop your products and services at home or on the go.

Narrow Your Target Audience

Narrowing your target audience is another great way to improve your ROAS and can help you win more conversions per dollar spent. For example, if you’re working with Facebook ads, you can narrow your parameters to include specific ages, locations, relationship statuses, and interests. At the same time, you can create ads targeting subgroups of that audience as needed.

It’s also worth researching the right platform for your ads as Facebook, Snapchat, TikTok, and other social media platforms cater to different audiences. If your audience tends to skew towards the younger side, it might be worth looking at Snapchat or TikTok versus Facebook. If your audience is older and more B2B-focused, you may want to invest more money into LinkedIn. By running ads on strategically-selected platforms, you can increase your campaign’s chance of success.

Refine Your Keyword Strategy

It can be tempting to focus on general keywords with large search volumes when choosing your campaign keywords. Bear in mind, however, that if you only focus on these keywords, you run the risk of spending a lot of money for little competitive gain. Your keywords need to be adequately brainstormed, and that means getting inside your customers’ minds and figuring out what they’re searching for and how they’re phrasing their search queries. It means picking out generic terms related to your products and services, mulling over any related terms or brand and competitor-related terms, and thinking about the relevance of each keyword on your list.

At the same time, you need to come up with a list of negative keywords, which are terms and phrases you don’t want your ads to show for. These keywords aren’t relevant to your campaign, so telling Google you don’t want your budget wasted on them will save you time, money, and headache in the future, especially as your campaigns become more complex.

What if you operate a physical store in addition to an eCommerce site? In that case, it might be worth looking into location-specific keywords, as plenty of people search online for information on local businesses.

Lower Your Campaign Costs

Last but certainly not least, you’ll want to do everything you can to stretch your PPC budget further. If you find that a particular campaign isn’t generating meaningful revenue and you’ve already done everything you can to tweak it, it’s probably time to scrap it and put your time and money into better-performing campaigns. Theoretically, your target audience research and keyword strategy refinements should save you money by helping you funnel cash to the keywords you’re most likely to rank for, thus putting you in touch with an audience more likely to convert. Likewise, you’ll want to put a proper cap on your PPC budget. While lots of click-throughs are great to see, they’re only a win if you have the budget to support them.

Improve Your ROAS with Help From the PPC and Search Marketing Experts at VELOX Media

At the end of the day, understanding and accurately tracking your ROAS is an essential part of running a successful digital marketing campaign. Not only does it offer insights into how your campaigns are performing, but it can also highlight potential issues, putting you in a better position to make smarter and more profitable decisions.

If you find yourself overwhelmed by the process or need extra assistance, the PPC and search marketing experts at VELOX Media can help. As a Google Premier Partner with over 10 years of experience in paid advertising campaigns across a variety of industries, our revenue-modeled approach works locally and globally to help identify new keyword opportunities for your business and help you hit seasonal campaign targets. Reach out to VELOX Media to learn how we can help optimize your PPC campaigns for maximum conversions today.

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