Return on ad spend (ROAS) is a marketing metric that is widely used to track the effectiveness of digital marketing campaigns. ROAS measures the profit margin earned for every dollar spent on ads.
The higher the ROAS ratio, the more profitable the advertising campaign is. To calculate the return on ad spend, businesses need to calculate their total revenue generated from the ads and divide it by the total spent on advertising.
The target ROAS ratio differs for each business, depending on their industry and marketing goals. Profit margin is an important factor in determining ROAS, as it indicates the amount of profit earned from each sale.
However, it’s important to note that ROAS isn’t the only metric businesses should focus on and should be used in conjunction with other metrics to gain a complete picture of the advertising campaign’s success.
Ultimately, tracking ROAS helps businesses make data-driven decisions and optimize their advertising spending to drive revenue and growth.
So let’s get started!
ROAS (Return On Ad Spend): Meaning
ROAS is an important metric for measuring how successful your ad campaigns are. It helps you determine whether your investments in ads are actually resulting in returns.
Understanding ROAS will help you optimize your spending and maximize the success of your marketing efforts.
To ensure the best results from your campaigns, you should regularly track your return on advertising spend (ROAS). Make a spreadsheet to help you measure ROAS weekly for each of your campaigns running on different ad platforms.
This will give you an overview of performance and set a comparison standard within your organization.
Don’t compare marketing performance on different platforms based only on ROAS (return on advertising spend). To get a complete understanding of the effectiveness of each platform, calculate your return on investment (ROI), which considers all costs.
If you want to measure individual campaigns or key elements of your ads, then ROAS will be very helpful.
Figuring out your return on ad spend is easy; just divide the money you made from ads (revenue) by how much you spent on them (ad spend).
If you want to figure out your return on ad spend (ROAS) goal, you can use this equation. Begin by calculating the amount of money spent on Google Ads and how much money was made from products sold through those same ads.
After that, all you need to do is put in these values in the below formula:
Revenue ÷ Advertising Costs = ROAS
For Example: When you spend money on advertising, it’s important to look at how much money you make back. If you’ve spent $500 and made $1000 in sales, that means you have a return on ad spend (ROAS) of 200%.
That sounds like a good result, but for some businesses, 200% isn’t enough. Your return should be more than just enough to cover your ad costs; you want it to help you pay for other costs too.
Let’s take another example. If you earned $10,000 from a PPC Amazon ad and spent $2,000, you’d divide $10,000 by $2,000 to get 5. This means you made $5 for each $1 spent, for a ROAS of 5:1.
ROAS for Your Ad Campaign
ROAS calculations are useful for measuring how successful your marketing is from a financial standpoint. It can be used to determine whether your current strategies are generating enough money in return or if there’s more you could be doing.
By analyzing the inputs of the formula, you can gain valuable insights that will help you make better-informed decisions about your marketing efforts and ultimately grow your business.
You can track your marketing efforts and find out which channels generate the most revenue for you by looking at your total ad spend and total revenue from all campaigns.
Calculating your return on advertising spend (ROAS) is an important part of managing a successful campaign; if it isn’t performing, losses could soon add up.
You can use online services to automatically measure ROAS; Google Ads, for example, displays it on the dashboard.
Good ROAS/ High ROAS
ROAS stands for “Return on Ad Spend,” and a good ROAS is when you make more money from your ads than you put into them. Generally, 4:1 ($4 return for every $1 ad spend) is considered a solid ROAS, meaning that you’re turning a profit.
Once you reach 3:1, you’re on the right path towards earning money. Factors such as your tech stack, market impact, customer satisfaction, and business output all affect your ROAS.
If your return on ad spend (ROAS) is less than one-to-one, then something with your advertising needs to be changed. A ROAS of 1:1 means that for every dollar you spend, you make back exactly one dollar.
Your business’s life cycle also plays a role in the success of your ad campaign. For startups, ads are essential for growing their audience. Established businesses may opt for a lower ROAS if they prioritize raising brand visibility.
ROAS and ROI
When measuring how successful your investments are, you can use either the return on investment (ROI) or the return on ad spend (ROAS).
ROI looks at your overall return, while ROAS only shows how well one particular ad worked. Understanding both helps you make better decisions about where to put your money.
ROAS only looks at how much money you’ve made from your ad campaign, while ROI also takes into account all costs associated with operating the business.
ROAS can show you if your ads are making money, but it doesn’t tell you if they’re actually giving you a profit.
To see a summary of the differences between these two metrics, take a look at the example below.
Example- Difference between ROAS vs. ROI
ROAS is a measure of how well your ads are performing, while ROI gauges the overall profit of your campaign.
Let’s look at an example. Imagine your business makes $100,000 in sales and spends $25,000 on advertising. Plus, other expenses total up to $80,000.
Once we calculate both metrics, their figures come up to 400% ROAS and -4.76% ROI. Although the ROAS looks great, the overall project is not profitable.
Thus, staying informed of both your return on investment (ROI) and return on ad spend (ROAS) is vital when you’re launching mobile advertising campaigns. This helps make sure you’re getting the best results from your efforts.
Use ROAS: A Better Metric than Most Others
Digital advertising comes with a lot of numbers to track, but one statistic stands out above the rest: return on advertising spend (ROAS). It’s more accurate at predicting performance than any other metric.
That’s why it’s so important for advertisers to understand and use ROAS when evaluating the success of their campaigns.
When marketers assess their ads, they often look at metrics like CTR, CPC, and engagement to measure performance. However, this can lead to a skewed understanding of how successful an ad is without factoring in the revenue it brings in.
For example, low CTR does not always mean poor performance; it’s possible to have a low CTR but a high return on ad spend (ROAS).
To get the best understanding of your ads, make sure you evaluate them based on revenue as well as other metrics.
How to Improve ROAS?
1. Reduce Your Ad Cost
Here are some methods on how to reduce your ad spend so as to improve your ROAS:
i) Optimize Your Bidding Strategy
Make changes to your ad bidding plan to get the best results. Keep testing different methods; just because one approach works now, doesn’t mean that it will keep working.
As the marketplace shifts, so should your strategy to make sure you stay on top.
Here are two types of bidding strategies you can use in Google ads:
Manual Bidding: With manual bidding, you have control over how much you spend on your ads. You can customize the maximum amount per click to keep costs in check without sacrificing conversions.
Automated Bidding: Automated bidding helps you get more from your ads by optimizing your performance in each auction. It uses artificial intelligence to make sure your goals are met with the best possible results.
ii) Lower Position in SERP
To save money and get a better return on your advertising investment, lower the position of your ad.
Putting your ad in a lower spot on the search engine results page will cost less and still show up for potential customers on the first page. It’s also important to note that it will still be within view, above the fold.
iii) Target Your Audience
To reduce your ad costs and increase return on ad spend (ROAS), focus your campaigns on the people most likely to be interested in your product or service.
Gather information about target users, such as their location, job title, and device type. Break them into groups, and tailor ads and landing page experiences for each segment.
This can help boost your Google Quality Score, click-through rate, and engagement with users.
iv) Conduct Effective Keyword Research
To improve your advertising return on investment, take time to research and use the best keywords for your campaigns. Think strategically about using negative keywords so you can focus on the search terms that your audience finds relevant.
You might also consider bidding on competitors’ brand terms in order to make sure you are included in related search results.
2. Make Your Website Mobile-Responsive
If you want more customers to find your website on their smartphones, it’s important to make sure it’s mobile-friendly.
Fast page loads, personalized content based on location, and less cluttered product pages can all help improve the mobile shopping experience. Reducing checkout time can also help reduce cart abandonment.
3. Amplify your AOV
Increase the amount each customer spends with your store! Every time someone buys something from you online, aim to get them to add extra items.
The more they spend, the higher the return on ad spending is likely to be. To work out your average order value (AOV), take all the money you make from sales and divide it by the total orders.
Formula to calculate AOV: Total revenue from sales/total orders = AOV
You can enhance AOV by:
- Increase your average order value by stimulating customers with limited-time website offers.
- Encourage bigger purchases by making a premium option available.
- Add value to the customer’s purchase and increase AOV by cross-selling accessories.
- Reward customers with free shipping when they reach a spending threshold.
- Boost AOV and delight customers with product bundles that offer multiple items for one low price.
- Keep customers engaged on your website by introducing pop-ups during their visit.
- Show your appreciation to returning customers with a loyalty program designed to reward them.
Also, improve your average order value by providing superior customer service. Give clients multiple ways to contact you, like email and phone support.
To take it a step further, consider offering a live chat option available 24 hours a day. Doing so will help you create an exceptional customer service experience and enhance your AOV.
4. Optimize Your Ads with Relevant Landing Pages
You can get better results from your ads by connecting them to relevant landing pages. This way, when someone clicks on one of your ads, they feel like their search is being recognized.
Doing this will make it much more likely for people to turn into customers, which can result in a higher return on investment.
These three tips can help make landing pages better and turn visitors into customers:
i) Make Customized Landing Pages
Make customized post-click pages for each visitor. Follow best practices and ensure your pages match the user’s needs and wants, so more people will likely purchase something. This can help you make more money from advertising.
ii) Optimize Page Speed
Optimizing this will help your page speed and keep people interested in what you have to offer.
iii) Follow a Compelling Tone
Tell an interesting story to capture your audience’s attention. Use information about who they are and what matters to them in the story. Speak in a way that will get your message across nicely.
Wrapping it Up!
Thus, return on ad spend (ROAS) is a crucial metric for any marketer looking to evaluate the effectiveness of their advertising campaigns.
ROAS is defined as the revenue generated from an ad campaign divided by the cost of the campaign. Essentially, it is a measure of how much money your advertising efforts are bringing in compared to how much you are spending.
A minimum ROAS is essential for ensuring that your business is profitable. If your ROAS is too low, you are essentially losing money on advertising.
Fortunately, it is easy to calculate the cost and revenue generated from advertising, so you can find your ROAS at either the ad group level or campaign level.
There are several ways to calculate your return on ad spend, such as using tracking pixels and conversion tracking.
If your ROAS is not meeting your business goals, there are ways to improve it, such as optimizing your ad targeting and adjusting your ad spend.
Overall, it’s important to rely on ROAS as a key metric for measuring the success of your advertising campaigns.