Return On Ad Spend (ROAS) is a marketing metric used to measure the overall success and efficiency of a digital advertising campaign. This metric helps business owners determine which methods are working and those are not and how they can improve future advertising efforts. In digital marketing, you will do some mathematics, so if you think you have escaped the rudiments of maths you have another thing coming. As a marketer, you need to be able to analyze data and calculate the effectiveness of a campaign, even though math might not be your thing. One of the most important metrics you have to calculate as a digital marketer is the return on ad spend (ROAS). In this article, we are going to tell you everything you need to know about ROAS, including how to calculate it and strategies you can use in getting the best ROAS.
What is Return On Ad Spend (ROAS)
ROAS (return on ad spend) in simple terms is a marketing metric that measures the performance and effectiveness of a digital advertising campaign. It is used by digital and online marketers to measure and track the success and financial return of an advertising campaign, ad group, and digital advertising.
Anytime you run a successful advertising campaign, it is expected that you will make more than what you spent on the campaign. The higher your ROAS, the more you’re getting out of your advertising money. Note that having a high return on ad spend does not necessarily mean profit for your business, as there are many other expenses that have to be deducted before determining your net profit margin.
Overall, ROAS provides businesses with a detailed understanding of whether or not a campaign is paying off. For example, a business spends $2,000 on an online advertising campaign in a single month. In this month, the campaign resulted in revenue of $10,000 Therefore, the ROAS is a ratio of 5 to 1 as $10,000 divided by $2,000 = $5. This means that 5 dollars are being made for every 1dollar spent.
Tracking this metric can help businesses improve their ad strategies and monetary returns.
How To Calculate Return on Ad Spend
ROAS is calculated by dividing your company’s revenue by the amount you spent on advertising during a specific period, or by dividing your total conversion by your advertising costs. Note that the conversion value is the amount of revenue your business earns from a given conversion. ROAS equals total revenue/total ad spend or advertising cost.
For example, if it costs you $200 in ad spend to sell one unit of a $2000 product, your ROAS is 10. Meaning for each dollar you spend on advertising, you earn $10 back.
Another example shows that you ran a $5,000 Google Display Ad campaign last month. From that campaign, you generated a revenue of $30,000. Plugging that into the formula means $30,000 is divided by $5,000, which equals 6. That means for every 1 dollar spent on the ad, you made 6 dollars.
How To Improve ROAS
1. Track your ROAS accurately
One way to improve ROAS is by tracking the ROAS metric accurately. If you don’t track this metric accurately, your campaign might not do well. Make sure you review all the data you’re using to calculate the metric. Take into consideration all the costs of your advertising. Note that when calculating ROAS, you must only consider advertising costs and not other costs like order fulfilment as this will make your ROAS lower than it is.
2. Make use of Negative Keywords
Negative keywords can help your ROAS do well. Negative keywords do not appear in searches that feature those keywords. Although, these keywords, while similar to your targeted keywords, tend to go outside the scope of your business, products, or services. The average Google Ads account wastes about 76% of its budget targeting the wrong keywords. This is where negative keywords come in
3. Reduce labour costs
The best way to improve your ROAS is to increase your overall revenue or reduce ad spending by optimizing your ad performance. This could mean that you will increase the price of your product and services or look for alternative vendors who will let you reduce your production costs. You can also reduce labour costs to improve ROAS.
4. Create Ads for a Mobile Audience
Another way to improve your ROAS is to create ads that target mobile audiences. Research shows that there are currently more searches on mobile devices than desktops. A lot of people now make use of mobile devices and creating ads that target these audiences make helps your business generate more return on ad spend.
5. Optimize Your landing pages
Optimizing your landing pages can help your return on ad spend. Your landing page needs to be optimized for conversion. Landing pages that are jam-packed with a lot of information usually end up as a turn-off to most users. Furthermore, your landing page must be user friendly and optimized for mobile users to capture valuable leads.
5. Run A/B tests
Use automated testing to find out what works and what does not work for your goals, and use those insights to drop ads that are not generating results.
Why Your Business Need To Focus On Ad Spend
- Calculating Return on Ad Spends will help your business measure the effectiveness and financial return of their advertising campaigns. The higher your ROAS, the more you’re getting out of your advertising money.
- Return on ad spend will help you determine if a specific advertising campaign was profitable or not. Therefore, if you want to have a successful campaign in the future, you must leverage this metric.
- Tracking ROAS for different ad campaigns can help you see what works for your target audience and which ones do not. Knowing this will help you generate more revenue for your business.
- ROAS helps you determine if certain ad campaigns aren’t paying off or certain cost-per-click ads aren’t getting the conversions you need. Knowing this can help you readjust your future budget to get better performance.
- If a specific keyword or advertising campaign has an extra high ROAS, you can create more content around that topic. Take a good thing and run with it.
What Makes a Good ROAS?
What makes a good return on ad spend depends entirely on the type of business, campaign or industry. However, an acceptable ROAS is often influenced by profit margins, operating expenses, and the overall health of the business.
A general rule of thumb is that a successful ROAS will indicate a ratio of 4:1. That is $4 revenue to $1 in ad spend. However, this is just a guide as some businesses might need a ROAS of 10:1 to stay profitable, while others can do well with just 3:1
A business can gauge its ROAS goal when it has a defined budget and a firm handle on its profit margins. A large margin will mean that the business can survive a low ROAS while smaller margins mean that a business must maintain low advertising costs to stay profitable.