ROAS: Your Guide To Return On Ad Spend
ROAS is a crucial metric for any online advertiser and is the online advertising equivalent of Return on Investment (ROI).
ROAS is often used to describe the profits attributable to, and made by, advertising campaigns. The goal of this cornerstone metric is simply to measure the effectiveness of your marketing campaign.
What is ROAS?
Return on ad spend is a marketing metric that measures the revenue earned by your business for every dollar spent on advertising. For all purposes and intents, ROAS is similar to ROI (Return on Investment). In this case, the money you are spending on digital advertising is an investment on which you are tracking your returns.
At its simplest, ROAS usually measures the effectiveness of your advertising efforts and the more effectively your messages connect with prospects, the more revenue you should expect to earn from every dollar of advertising spend. Ultimately, a high ROAS is better.
If you’re so inclined, you could measure Return on Ad Spend at different levels within your Google Ads account: the ad group level, the campaign level, the account level, and so on. Provided you know your spending and earning at every level, you can easily calculate ROAS.
ROAS and ROI are quite similar because they aid in evaluating how well campaign efforts perform. But, although digital marketers might often use these terms interchangeably, the truth is that they are different. ROI typically focuses on the overall success of your digital marketing efforts, and if often tied to an entire strategy. In the perspective of paid search ads, ROI measures the ad profit in relation to the cost. Usually, Return on Investment is a business-centric metric which helps you to better understand how ads contribute to your business’ bottom line.
ROAS, on the other hand, focuses on particular advertising campaigns, groups, or even keywords. The ad-centric metric usually measures the gross revenue generated based on every dollar you spend on ads. It specifically aids in understanding the effectiveness of a PPC or paid search ad campaign.
Why Understanding ROAS is Essential
So, what’s all the craze about return on ad spend? ROAS is arguably the best metric for helping a business understand how every PPC ad campaign is performing. This metric also gives you all the information you will need to prioritize your campaign spending across your paid search campaigns.
For instance, let’s assume your business is running 5 different PPC ad campaigns simultaneously. You You’re looking to boost your ad spend but aren’t sure what campaigns are offering the best results per dollar. ROAS will give that answer, thereby letting you optimize your PPC budget by increasing expenditure on the best performing ads.
Once the ROAS for every ad campaign is ready, you can see which campaigns are giving more value for money. And if you realize that some campaigns greatly outperform others, you might think about reallocating some of your ad campaign budget to campaigns that are performing well.
What’s great about ROAS is that it isn’t only good for ad campaigns. You could also use the metric to evaluate target keywords and ad groups as well. For instance, if you realize that your ROAS is higher for specific keywords that you’re targeting, you might want to create new PPC ad campaigns based on the high performing keywords.
Now that we’ve defined return on ad spend and seen why it’s such an important metric, let’s he how you can go about calculating it. Contrary to other marketing calculations, ROAS is fairly easy to calculate due to the simplicity of the ROAS formula. ROAS is simply the total campaign revenue divided by the advertising campaign costs.
Prior to putting the ROAS formula to work, you must first determine the component of your online advertisements you’d like to evaluate. After that, take the total revenue that the ad has generated and subtract the amount spent to run the ad, after which you’ll divide this value by your ad spend.
A majority of PPC campaign management channels like Google Ads make it easy for you to track conversions and sales for every ad. With the conversion and sale data at your disposal, you can put it into the ROAS formula so as to understand the return on ad spend.
Is Your ROAS Good?
After calculating ROAS, you’ll probably wonder – what’s good ROAS? Well, the truth is that there isn’t a right answer for what good ROAS is. Usually, a good return on ad spend depends on the type of business as well as what it sells. However, there are a few guidelines for determining whether your business is achieving a good return on advertising spent.
Although ROAS does not necessarily try to explain the impact a specific campaign has on your ecommerce business or company, determining a good return on advertising spend for your campaigns requires you to consider several business-related factors.
First, you must think about your overall goals growth wise, and your timespan for achieving the goals. However, your goal should not be to do “good enough” and an above-average return on advertising spend might not suffice.
An acceptable Return On Ad Spend is typically influenced by operating expenses, profit margins, and the general operating health of a company.
And while there isn’t a conclusively right answer for this question, a common ROAS benchmark is a ratio of 5:1, or $5 in revenue for $1 ad spend. New businesses operating at lower budgets might need higher margins, while e-commerce stores that are committed to growth can afford to spend more on advertising. A company will gauge its ROAS goal once it defines its budget as well as gets a firm idea about its budget margins.
Ultimately, defining a good return on ad spend depends on whether you mean “good for the advertising campaign” or “good for a company or niche.” Objectively, a good ROAS should be at least 400 – 500%.
Improving Return on Advertising Spend
The only surefire way to actually improve your ROAS is to increase your overall revenue or reduce ad spending by optimizing your ads. Increasing your revenue could require that you significantly increase prices or look for different vendors who will let you reduce your production costs. It could have nothing to do with your PPC campaigns!
And while we won’t possibly give every detail about how you can optimize your ads, here’s a snapshot of what you can do to improve your ROAS.
1. Create Ads for a Mobile Audience
As you think about ROAS for your Google Ads or Facebook Ads, it is important to factor in your mobile audience.
Google research shows that there are currently more searches on mobile devices that desktops. Besides, close to 50% of consumers who perform a local search for a service or product will make a purchase in a day of performing the search. And since most local searches are done on mobile gadgets, it is crucial to have these users in mind as you create PPC ads.
2. Consider the User Journey
Virtually all aspects of paid search ads come back to your audience. Failure to think about the consumer as well as their position in the buyer’s journey means that you might miss out on profit maximization. And although most PPC ad journeys begin with a single click, you must carefully plan where a user goes next.
For instance, when creating your PPC ads, you want to ensure that you’re giving an offer relevant to the buyer you’re targeting. And this is where buyer personas come into play. Besides, there are chances that you’ll have more than a single buyer so think about how the ads will be perceived by the target audience.
Besides offering relevant offers based on your target buyer and their position in the buyer’s journey, you need to consider the messaging. PPC ad messaging must be consistent across all campaigns when it comes to tone and brand voice. However, the way you capture their attention and convince them to make a step forward depends on their behaviors and motivations as well as where they are in the consumer journey.
3. Watch Your Competitors
Just like any other marketing tactic or strategy, it pays to watch your competition. Are they running successful PPC ads? What is it that they are doing well? By evaluating their mistakes and successes, you can easily look for ways to bolster your own advertising campaigns. Although there isn’t a way to understand how the ads perform without approaching them, you can easily see the kind of ad content they are feeding to search engine users and look for ways to emulate. If you're running Facebook ads, it's easy to find exactly what ads your competitors are using.
4. Work Towards Improving Your Ads Quality Score
When talking about Google Ads, a higher Google quality score means that your cost per click goes lower and, as a result, your ad ranking increases. These factors play a crucial role in the chances of search engine users seeing and clicking on your advertisements.
There’s a correlation between quality score and lower cost per conversion, and lower ad campaign costs mean that you’ll enjoy a higher ROAS. Google often uses quality score to determine an ad ranking, with a large part of your quality score formula revolving around the ad relevance.
To improve ad relevance, you could begin by structuring the campaigns into smaller, more targeted groups. Instead of a single ad group with all keywords, create ad groups which are specific and directly related to the keywords they have.
ROAS Pitfalls You Should Look Out For
Although focusing on improving ROAS could be helpful, approaching it from the wrong angle could be detrimental to your online advertising campaigns and business at large. Here are a few pitfalls to be conversant with so that you don’t go astray with your online marketing efforts.
1. ROAS Doesn’t Apply to All Marketing Efforts
Let’s face it; ROAS can’t be applied on all marketing efforts. For you to assess any marketing campaign using ROAS, its true cost should be concrete. For instance, since PPC advertisements usually have a concretely-defined budget, establishing the return on advertising spend for a PPC campaign requires that you divide revenue by cost. On the flip side, the actual ad cost of many marketing campaigns can’t be determined on a per-instance basis.
2. Ad Campaigns Don’t All Contribute Directly to Sales
Here, we will focus on the ROAS formula’s numerator. As you probably know, not every marketing effort will translate to a conversion, and many initiatives are not meant to do so as well. Some initiatives – like newsletters and blog posts – are supposed to capture the attention of target audience and get them to engage more with a brand. Others, like testimonials and customer reviews are deal closers.
In simple terms, it wouldn’t make sense to evaluate the return on ad spend of any top-of-the-funnel marketing effort. Although these initiatives could play a crucial role in the customer’s buying decision, since the aim isn’t to make a direct sale, there isn’t sufficient reason to bring in ROAS when assessing the overall campaign’s effectiveness.
Sole reliance on return on advertising spend metrics could be misleading. The value of ROAS to any business or company often depends on the aims of the advertising campaign, conversion factors, and what’s being spent. Some campaigns could give a high ROAS but the company might end up losing money since the service or product they sell costs too much to produce, given the available ad budget. This could be the case where the costs are combined with the overall advertising cost.
However, this shouldn’t mean that marketing efforts weren’t successful. ROAS is calculated by considering the cost of advertising, so any other factors that could be eating into your profits might not be factored in.
All the same, ROAS could be extremely helpful for a business when used appropriately. It could help in determining whether the ad campaign being used is yielding profits – quite sooner as opposed to when it’s too late.
If you're interested in tracking ROAS, you can do so in our PPC dashboard or PPC reporting template.
Written by Lisa Raehsler
Lisa is a self-published writer and editor who has worked in the PPC/Search Engine Marketing niche for years. As a search engine marketing expert, she has led hundreds of paid advertising accounts for search engines, mobile, display, retargeting, and social media ad campaigns. When she's not writing, she can be found with her nose stuck in a book.