Advertising is arguably a field for creative folk. You need a good deal of innovation and out-of-the-box thinking to stand out in today’s competitive business landscape.
But marketers also need to analyze numbers and data to measure the effectiveness of advertising campaigns. Because ultimately, any marketing campaign is about driving revenue. This is where return on ad spend comes into play.
Keep reading to learn what return on ad spend (a.k.a. ROAS) means, why it’s important and how to calculate it. We will also cover strategies for improving the ROAS of your future campaigns.
What is return on ad spend (ROAS)?
When you launch a new ad campaign, you’re sure to track some key performance indicators (KPIs) to gauge the campaign’s effectiveness and make improvements.
Popular advertising KPIs include click-through rate (CTR), conversion rate and cost per conversion.
But while these metrics are meaningful on their own, individually, they don’t give you an understanding of the overall monetary success of your ad campaign.
Return on ad spend (ROAS) is a marketing metric that measures the revenue generated per every dollar spent in an advertising campaign. As such, it provides you with a complete, big picture understanding of whether or not a campaign is paying off.
ROAS is often expressed as a ratio. For example, if you generated $800 in revenue from a Facebook Ads campaign that cost you $100 to run, then your ROAS would be 8:1, representing $8 made for every $1 spent.
ROAS is similar to ROI (return on investment), but it only looks at the monetary return from a specific ad campaign.
In contrast, ROI measures the return of a larger investment. You would use this metric to measure the return on a marketing campaign that included ads as well as other marketing expenses, e.g. working with an influencer or hiring a web developer.
The more effective your ad campaign is, the more revenue you’ll earn from each dollar spent on the campaign. And as you’d expect, the higher your ROAS, the better. Still, the question is…
Why does calculating return on ad spend matter?
There are so many other metrics you could analyze to optimize your ad campaign. So even though ROAS is an easy metric to calculate, you may be wondering why you should bother with it at all. Wouldn’t tracking conversions or click-through rate be enough?
Without tracking ROAS (in addition to those other metrics), you might end up making sub-optimal decisions based on limited information.
Unless you’re specifically focused on raising brand awareness, you should be treating revenue as the ideal outcome of your ad campaigns. Without calculating and tracking ROAS, you won’t be able to keep track of how your campaigns are doing in terms of generating revenue. And without that, you can’t optimize them for success.
When you track ROAS throughout an ad campaign, you can see the performance over time. This can help determine whether the campaign is bringing in the money you expect it to, and whether you should renew the campaign or pivot quickly to avoid wasting more of your ad budget.
Not to mention your company’s top-level executives likely want to know exactly how much revenue your advertising and marketing efforts generate. Tracking ROAS will help you answer that question accurately.
In essence, ROAS helps you figure out which ad campaigns are truly driving results and how you can improve your future online advertising efforts based on the ad groups and keywords working well presently. Plus, based on ROAS, you can continuously refine your ad spend to generate the most revenue.
How to calculate return on ad spend
Calculating ROAS is pretty straightforward. By definition, ROAS is the ratio of the revenue generated from an ad campaign to the cost incurred on the campaign.
For instance, if you spend $1,000 on a Google Ads campaign in a month and earn an average of $4,000 per month from people who clicked on those ads, your ROAS is $4,000 divided by $1,000 (or 4:1).
While the ROAS calculation is simple, it can be challenging to gather the data needed to run it.
To gain an accurate insight into the effectiveness of your ad campaign using ROAS, you must know exactly how much revenue the campaign is generating. This can get a bit tricky, as the customer journey is often windy, and attributing sales to specific ads requires some data crunching.
So if someone clicks on your Facebook Ad and eventually converts after having an offline call, how do you tie your ad spend to that offline conversion? For this, you’ll need to use the Facebook attribution tool.
All in all, make sure the revenue and cost data you use to calculate your ROAS is as accurate as possible.
What is a good average ROAS?
There’s no right answer to this question. That’s because a “good” ROAS varies significantly from business to business, campaign to campaign, platform to platform and industry to industry.
For example, if your campaign’s goal is to increase brand awareness or build a social following — rather than generate sales — you can expect a low ROAS.
That said, in general, a ROAS of 4:1 ($4 in revenue for every $1 spent) or higher usually suggests a successful campaign.
But keep in mind that this is just a benchmark, not something to swear by. Some businesses need a ROAS of 10:1 to stay profitable, while others can do well with just 3:1.
When setting a ROAS goal, keep your profit margins in mind. A large profit margin means you can continue the campaign with a low ROAS, whereas smaller margins demand a relatively higher ROAS and low advertising costs to maintain profitability.
ROAS can also vary by platform. For instance, the average ROAS for Google Ads is 2:1.
ROAS vs. ROI
An advertising campaign is a cost and not an investment per se, as an investment is typically something that drives value in the long run.
For example, you can consider blogging an investment because each published post can generate leads and revenue for years to come. An ad campaign, on the other hand, only drives traffic and revenue as long as you’re paying for it to run.
ROAS is used to calculate the revenue return from a particular ad campaign. It only takes advertising costs into consideration and provides an overview of a specific campaign’s success.
ROI looks at the bigger picture, such as whether your larger marketing strategy is yielding results or not. ROI is affected by other costs, such as labor costs or order fulfillment costs for an eCommerce business.
Where ROAS is more of a short-term measurement, ROI is one for the long run.
It’s a good idea to measure both ROAS and ROI for each campaign. ROAS would measure the direct revenue generated, while ROI would provide insights into how the campaign contributed to your long-term marketing goals.
Is ROAS more important than click-through rate?
Apples and oranges — well, sort of.
ROAS gives you a more definite answer as to whether or not your campaign made you money.
Click-through rates give you an understanding of whether your copy, creatives and calls to action encouraged your audience to click on your ads. What CTR doesn’t measure is whether they became paying customers after clicking on the ad.
When considered together, ROAS and CTR provide a comprehensive understanding of your ad campaign’s performance. And so, you can’t think of one as better than the other.
For instance, if your ad’s CTR is high (say, over 9,000 clicks) but your ROAS is around 2:1, then you know the ad is generating click-worthy interest, but your audience is not converting at a satisfactory rate. It might be time to look at the quality of your landing page, ad relevance and targeting.
Should I track ROAS over conversion rate?
Again, both metrics have different purposes, which means it’s not a good idea to “prefer” one over the other.
A conversion happens when your audience takes some desired action. This doesn’t necessarily have to be a purchase.
For example, your ad campaign may direct people to a landing page offering a free ebook. If you have a conversion rate of 10%, what does that mean in terms of revenue?
You won’t know unless you also track ROAS. While resource downloads or email signups might not make you money, users who take these actions might become paying customers eventually. Thus, it’s best to follow both metrics.
4 ways to improve your return on ad spend
1. Review its accuracy
The last thing you want to do is scrap a campaign with great potential only because you’re not tracking your ROAS accurately.
So, your first step in tracking ROAS should be reviewing the data you’re using to calculate the metric. Are you considering all the costs of your advertising? Are you including offline sales and other indirect revenue?
Also, what Google Ads attribution model are you using?
Source: Search Engine Journal
First or last-click attribution models can skew ROAS and make a successful campaign look ineffective. Ensure you are using an attribution model that’s appropriate for your campaign.
Plus, when calculating ROAS, you must only consider advertising costs and not other costs like order fulfillment. Including other costs will make your ROAS lower than it actually is.
2. Lower the cost of your ads
Looking at the equation, if you can lower your campaign cost, you can boost your ROAS.
While the cost depends on your ad goals, targeting and other factors, here’s what you can do to try and lower your ad costs:
- Reduce labor costs: If you’re working with an ad agency, you could cut costs by doing it in-house. Conversely, if your in-house team is squandering way too much time, it might be time to outsource.
- Use negative keywords: The average Google Ads account wastes 76% of its budget targeting the wrong keywords. So, ensure you get your negative keywords list spot on.
- Improve Quality Score: Google’s Quality Score measures your ad quality, and whether your ads are relevant to the keywords they are targeting. A better Quality Score can result in a higher ad ranking and can drastically lower your costs.
- Narrow your target audience: Targeting a super-specific audience can help you funnel your dollars to the audience most likely to convert. For example, on Facebook, you can target ads based on numerous demographic parameters like age, location, interests, etc.
- Run A/B tests. Use automated testing to find out what works for your goals, and use those insights to drop ads that are not generating results.
3. Maximize the revenue generated by ads
Now for the other part of the equation. Here are a couple of ways to try and improve the revenue generated by your campaign:
- Refine your keywords. Consider restarting your keyword research and targeting keywords with less competition to give your ad a chance to gain more clicks.
- Automate bidding. If you are running Google Ads, consider using Google’s automated bid strategies to set a target ROAS.
4. Probe other issues not related to ads
A low ROAS could also be caused by issues not directly related to your ad campaign itself.
For example, if your ROAS is low, but sales are high, it could mean your product is priced too low. Or, if the CTR is high, but ROAS is low, it could mean either of the following:
- The ad’s copy is misleading.
- The landing page isn’t well-designed, with unclear CTAs or copy.
- The checkout process is lengthy or complicated.
- The product is priced too high.
As you see, there are many possible reasons behind a low ROAS, ranging from improper keyword or audience targeting to an unoptimized landing page. Consider the steps outlined above and keep an eye on other metrics to try and improve your ROAS.
Many happy returns… on your ad spend
Return on ad spend is a powerful advertising metric. Its value lies in the ability to provide digital marketers with thorough insights into the effectiveness of ad campaigns.
Together with other metrics, ROAS can help you figure out whether your campaigns are generating real results. Knowing that your ROAS is low, you can tweak your campaign settings, landing pages or the ads themselves.
So if you frequently run paid ads as part of your marketing strategy, make sure to track your return on advertising spend to continually optimize the revenue generated from each ad dollar spent.
Are you currently tracking ROAS for your campaigns? If so, what are you doing to improve this metric? Do let us know by dropping a quick comment below!
Santhosh Muralidhar says
These are good tips to increase the ROAS of google ads campaigns. But I have a doubt. You mentioned, “including costs outside of ad spend”. I was just wondering how could google ads include those costs for reporting the ROAS?.
Apart from that, I must appreciate that everything you said right from reviewing negative keywords to landing page optimization and agency cost and so on made a lot of sense to improve the ROAS.