ROAS, or return on ad spend, is one of the simplest revenue-based metrics to measure. However, it is a highly underutilized metric. Calculating your ROAS can help you know if you are spending your ad costs effectively. In this article, we will tell you how to calculate your ROAS for various marketing channels, what ROAS tells you, and why you should use this metric to measure the success of your ad campaigns.
ROAS: Return on Ad Spend
ROAS stands for return on ad spend. It is a popular metric in the digital marketing industry in particular and is similar to ROI, or return on investment.
Return on ad spend measures the amount of revenue your business earns for each dollar spent on advertising.
Whenever you launch a new ad campaign, you need to track some key performance indicators, or KPIs, in order to measure the campaign’s effectiveness and make adjustments accordingly. Some popular KPIs include click-through rate (CTR), conversion rate, and cost per conversion. However, these calculations don’t individually help you understand the monetary success of your overall ad campaign.
Formula for ROAS
The return on ad spend formula is expressed as a ratio. It is simply the total revenue generated for a marketing channel, like pay-per-click ads, divided by the total spend on that channel. Or:
(Revenue/Spend) = Return on Ad Spend
That’s pretty simple, right? Let’s take an example. For instance, if you spend $5,000 on paid search in June, and generated $20,000 in revenue, your ROAS for paid search is $4:1. That’s because ($40,000/$10,000=$4.) This means for every dollar spent, you made four dollars.
(If this is tricky for you, there are also ROAS calculators available online to help you.)
What ROAS Tells You
ROAS is most commonly used by ecommerce businesses to determine the success of a marketing campaign. It tells you if a marketing channel is performing at a level that allows for profitability.
This metric tells you how much revenue you generate from each advertising dollar you spend. For example, if your ROAS is $4:1, it means that for every $1 you spend, you generate $4 in revenue. Unlike other PPC metrics, the higher your number in ROAS, the better.
What is a Good ROAS?
The answer depends on your business. For some businesses, a $4:1 ROAS is very good. Other businesses need a $10:1 ROAS to stay profitable. Your ideal return on ad spend depends on the profit margins of your products and/or services. A big margin means you can afford a low ROAS, and small margins mean you need to keep your ad budget on the lower end based on percentage, so your goal will be a higher ROAS.
How to Maximize Your Return on Ad Spend in Google Ads
There are several ways you can improve your advertising efforts in order to increase your conversion rate and bottom line.
Why You Should Use ROAS
ROAS is an excellent metric because combined with CPL/CPA goals, it helps you get a more holistic view of your marketing channels’ performance. This is because it takes into account traffic and lead quality. For instance, if you have a low CPL and a low ROAS, you are not creating quality leads. This can help you alter your advertising campaign as necessary.
ROAS vs. ROI
An advertising campaign is typically referred to as an advertising cost rather than an investment because an investment is typically defined as an effort that drives value in the long run. For instance, blogging is considered an investment because the posts you create will drive traffic to your site and create leads for the future. An ad campaign, however, only works for as long as you pay for it to continue.
ROAS is used to calculate the return from one specific ad campaign. ROI, on the other hand, looks at the bigger picture.
How to Improve Your Return on Ad Spend
Now that you know your ROAS, perhaps you want to improve your ratio. Here are four ways to improve your ROAS.
Check Its Accuracy
It would be terrible to shut down an ad campaign that is working solely because you didn’t calculate your ROAS correctly. Make sure to review the data you use to come up with your metric. Did you consider all the costs of your ads? Did you remember to include offline sales and other indirect revenue?
Lower the Cost of Your Ads
If you can lower the cost of your campaign, you can improve your ROAS. There are several ways you can lower the cost of your ads, including reducing labor costs, using negative keywords, improving your Google Quality Score, narrowing your target audience, and running A/B tests.
Maximize the Revenue Generated by Ads
There are also ways you can increase the revenue you are generating with your ad campaign in order to improve your return on ad spend. You can try refining your keywords, which means starting over with your keyword research and targeting the keywords with less competition in order to get more clicks. If you are running Google Ads, you can also use Google’s automated bidding strategies to set a target ROAS.
Check for Other Issues Unrelated to Your Ads
There could be reasons for a low ROAS that are not directly related to your ads or the campaign itself. For instance, if your ROAS is low, but you are still making a lot of sales, maybe your products are priced too low. Or, if your CTR is high but your ROAS is low, you might have misleading ad copy, a poor landing page, too lengthy of a checkout process, or perhaps your product is priced too high.
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- What is ROAS?
- How do I calculate ROAS?
- What does ROAS tell me?
- Is there a difference between ROI and ROAS?
- What is a good ROAS?