Digital advertising spend has reached record levels and according to eMarketer, global digital ad spend is forecast to reach $441 billion by the end of 2022.
With all this capital invested it’s important for businesses, both big and small, to generate a high return on ad spend (ROAS), to measure the monetary success of their advertising efforts. Not only will these companies need to track performance, they’ll need to leverage the data to make informed decisions when allocating marketing spend.
So, what does ROAS mean and why is it so important? We’ll take you through these questions along with tips on how to improve it.
What is Return on Ad Spend (ROAS)?
In digital marketing, Return on Ad Spend (ROAS) is a metric that measures the amount of revenue your business earns for every dollar it spends on advertising. In simple terms – it is the return of advertising expenditures. ROAS gives insight into the effectiveness of a specific ad campaign, not the overall Return on Investment ROI – more on that next. It places a numerical value on your marketing efforts and how well your advertising message/s connect with prospects and generate a return.
If you have heard of Return on Investment (ROI) and are wondering what the difference between ROI and ROAS is – ROI typically measures the return of a larger investment. For example, if you ran an omni-channel campaign that included digital ads as well as an influencer collab and maybe even a radio ad, then you would use ROI to measure the performance of the campaign across all the paid marketing efforts through all applicable channels.
ROAS only looks at the monetary return from a specific ad campaign. The higher your ROAS is, the more revenue you’ll see from each dollar spent on the campaign.
The Higher your ROAS = The more successful your campaign has been
How is ROAS Calculated?
Contrary to what you may think, the ROAS formula is straightforward. The below equation will provide a ratio that can help you determine whether your ad campaign was/is successful.
For example, let’s say you made $10 for every dollar spent on your advertising campaign. You ROAS would be 10:1 for that ad campaign. The ROAS formula is as follows:
ROAS = Ad Revenue/Ad Spend
Here’s the kicker – while the equation is simple, sometimes it can be difficult to collect the data needed to run this calculation. For example, you may need to consider the cost of the ad bid, the labour cost for the time it took to create the ad assets or even vendor costs. Ensuring you gather a close approximation of the budget invested on the ad will in turn provide you with the most accurate ROAS measurement. If your data isn’t accurate, your findings won’t be either.
How to calculate your ROAS from Google AdWords?
If you’re running Google Ads through AdWords and want to calculate your ROAS to understand your Return on Ad Spend through Google Ads – there is no special column dedicated to ROAS. Instead, this metric is presented as ‘Conversion Value/Cost’ which can be your ROAS calculator.
How to calculate your ROAS from Facebook Ads?
If you’re running Facebook ads and want an ROAS calculator to understand your Return on Ad Spend through Facebook, you can create a custom report column in your Facebook Ads Manager that will calculate ROAS automatically. It is important to note that ROAS calculated through Facebook is completely dependent on accurate information. Pixels need to fire on both your website and on your relevant conversion event. There must be no tracking gaps.
Why ROAS is Important
ROAS is important because it provides marketers the necessary information to prioritise their campaign spending. For example, let’s say you have 5 different PPC ads campaigns running simultaneously. You’re looking to boost your ad spend but aren’t sure which campaigns to invest in – those that get the most traffic, those with the highest number of conversions? What about boosting the campaigns with the greatest results per dollar invested?
ROAS will provide you with that answer, so you know exactly where to optimise your budget.
In addition, ROAS helps to:
1) Safeguard against major losses:
While advertising will be essential to many businesses, it can be expensive – too expensive if you’re not utilising the data. If a particular advertising campaign isn’t working, you want to know as soon as possible. Measuring ROAS can help to identify whether you need to tweak the messaging, reduce the budget, or end a campaign that isn’t working.
2) Keep Costs in Check:
Without calculating and measuring ROAS, you won’t be able to keep track of how your campaigns are performing and if they’re generating revenue – you can’t optimise for success. Overlooking ROAS can result in weak campaigns that run-up hefty costs and hurt your brand’s bottom line.
3) Guide Better Business Decisions:
f you measure ROAS, alongside other important KPIs relevant to your campaign, you can better understand your customers, what drives them to convert and the channels that engage them the most.
These campaigns can then be scaled to improve results and reduce cost per acquisition. Brands that carefully measure ROAS are more likely to make better business decisions with future ad budgets and marketing strategies.
What is a good ROAS goal to aim for?
While there is no correct answer – every industry, advertising channel or campaign is different, one thing most marketers will agree on is the higher the ROAS ratio, the better.
Any clear-cut figures outlining ROAS targets are likely to change as advertising costs increase. As digital ad spend rises, some retailers have seen their online ad costs increase by 89% in the first four months of 2021. If your ROAS diminishes and you’re not sure why – consider contributing factors that have an impact on ROAS like overall advertising spend.
Short terms events, like the Federal Election in 2022, also impact digital ad costs and ROAS as advertisers compete for ad space. So, deciding on the perfect ROAS goal to hit, can be a moveable feast depending on the context of the campaign.
In addition, most companies do not share their ad cost and revenue data, therefore identifying recent benchmarks for ROAS across industries can be challenging.
Lucky for you, Business Assist can offer some guidance.
You should typically aim for a standard ROAS target that is the average conversion value that you expect to receive for every dollar you spend on an advertisement. The target will vary according to an individual business and the product being sold; however, four to five times return on as spend are good numbers to aim for. In other words, $4 in revenue is generated for every $1 that is spent on the ad; a ratio of 4:1.
In 2016, a study conducted by Nielsen found that 4:1 was the average ROAS ratio for brands operating in the consumer-packaged goods sector. However, start-ups are likely to need a higher ROAS to cover costs and finance growth.
More recently, a 2021 report released by Sidecar assessing ‘Retail Industry Ad Performance’ revealed the following average ROAS for Facebook Ads, Google Paid Search Performance, and Instagram Advertising.
How to Interpret ROAS for marketing?
Although focusing on ROAS is important, approaching it from the wrong angle can be detrimental to your online advertising campaigns and business at large. Here are two key considerations to keep your marketing efforts on track.
- ROAS is important, but if it is the only metric you rely on, it can be misleading. You should always track ROAS alongside other key KPIs. This is because the value you place on the ROAS measurement will depend on your brand’s advertising objectives. For instance, you would place a higher value on ROAS if you’re focused on generating sales. However, if you want to build brand recognition and awareness, a lower ROAS isn’t necessarily bad news.
- It’s possible to have a healthy ROAS and still lose money. The ROAS formula only accounts for advertising costs. You will still have many other overhead costs that need to be considered. For example, if you are focusing on sales, think about your shipping costs.
Tips to improve ROAS
1. Lower the cost of your ads
If you can lower your campaign costs, you can boost your ROAS. Here are a few things you can do to lower your ad costs:
- Reduce labour costs: If you’re working with an ad agency, you could cut costs by doing it in-house. Alternatively, if your in-house team is not delivering the result you need, it could be time to outsource to get the job done right. You can learn more about how Business Assist delivers quality results here.
- Use negative keywords: Getting your keywords right is essential. According to Ad Espresso, the average Google Ads account wastes 76% of its budget targeting the wrong keywords. Therefore, ensure your negative keywords list is spot up to date so you aren’t throwing money at irrelevant users.
- Improve Quality Score: Quality Score is Google’s rating for the relevance, and quality of your ads and measures whether your ads are relevant to the keywords they are targeting. A higher Quality Score can result in a higher ad ranking and consequently lower ad costs.
- Run A/B tests: You can use insights gathered through A/B testing to improve your current ads or drop those that are not generating positive results. See our full guide to A/B testing here.
2. Refine your audience targeting
Narrowing your target audience can help you funnel your dollars towards the audience most likely to convert.
For example, you can create a retargeting campaign by targeting high-intent website visitors that have already shown interest in your brand. There is a much higher chance these users will convert as they are typically closer to making a purchasing decision. Alternatively, you can also try targeting prospects that have shown interest in your product or service but haven’t yet visited your website. Prospects who have watched 75% – 95% of your video ads are a good example.
Creating a Lookalike audience is another great way to effectively target prospects. This allows you to target people who share the same characteristics with your existing customer base or users who have shown interest in your brand. Again, there is a good chance that these users will convert.
The goal here is to test different audience types and monitor their ROAS. Doing so will allow you to determine which audience types are driving conversions and are worth investing more in.
3. Freshen up your creatives
We get it, putting hard work and long hours into your creatives just to have them underperform sucks.
However, it’s very important not to “fall in love” with your own creatives, or think you need to continue using it just because you put hard work into it if it does not drive good ROAS.
The reality of advertising is that not everything you like will be popular among your target audience; colours, font, images all resonate differently. Testing different creatives until you find the one that generates results and resonates with your target audience is a great way to mitigate losing money through underperforming creatives.
Once you find creative that produces a high ROAS, you can scale it up and possibly use it across multiple ads. However, it is important to note that even great creative will suffer from ad fatigue at some point. Typically, a high frequency rate will indicate ad fatigue.
Therefore, regularly refreshing your ads, experimenting with different creatives formats, and testing these constantly is the best way to encourage a higher ROAS.
4. Investigate issues unrelated to your ads
Low ROAS doesn’t always indicated a failed campaign. It’s possible that there may be issues outside of your ad strategy that are contributing to a low ROAS.
For example, if ROAS is low, but conversion rates are high, your product could be priced too low. Alternatively, a high click-through rate, but low conversion rate could indicate your product, or shipping costs are priced too high.
If users are abandoning their shopping carts, the UX could be interfering with the purchasing process. Do you have a clear call-to-action button (CTA) button guiding users where to click next? Is it clear to users where to go to complete their purchase? This could mean that the CTA on your landing page is not clear. Check out our guide to creating effective CTAs here.
As a result, it is important to always measure ROAS alongside other relevant KPIs to help determine where the issue lies. You can use the data from your campaigns to investigate and address any problems.
Summary: ROAS is a key metric for marketers that should always be considered alongside active campaigns. By combining it with other metrics, you can root out issues with campaigns that aren’t succeeding.When you determine what is and isn’t working on a campaign via ROAS, you have the opportunity to optimise certain elements including budget, audience targeting and creatives.
Alternatively, if you need help identifying issues related to ROAS and implementing the right solutions, get in touch through the form below. Business Assist are here to help with fully customised digital solutions based on proven strategies.
What is Return on Ad Spend?
Return on Ad Spend (ROAS) is a metric that measures the amount of revenue your business earns for every dollar it spends on advertising
How is ROAS Calculated?
The ROAS formula is: ROAS = Ad Revenue/Ad Spend. The equation will provide a ratio that can help you determine whether your ad campaign has been successful.
Why is ROAS Important?
ROAS is important because it assists marketers in knowing where to prioritise their campaign spend, when running multiple ad campaigns.