Paid advertising delivers quick, measurable results, with a 50% higher chance of generating sales than organic search alone (Unbounce). However, not all pay-per-click (PPC) campaigns hit the mark. Some attract many clicks but don’t convert, while others yield fewer clicks but result in significant conversions.
To ensure your paid advertising efforts don’t go to waste, focus on understanding your return on ad spending (ROAS) – a crucial metric that gauges campaign effectiveness.
In this guide, we’ll discuss:
• What Is ROAS?
• ROAS. vs. ROI: What’s the Difference?
• Why Is ROAS Important?
• How To Calculate ROAS
• What Is the Ideal ROAS?
• Limitations of the Return on Ad Spend Formula
• Factors Affecting Return on Ad Spend
• How To Improve Your ROAS
• Other Metrics To Track Beyond ROAS
What Is ROAS?
Return on advertising spend (ROAS) is a crucial metric used in digital marketing and advertising. It measures the effectiveness of an advertising campaign by evaluating the revenue generated relative to the amount spent on advertising.
For example, let’s say you made $500 in sales from an advertising campaign that cost you $100. Your ROAS would be 5:1, meaning you generated five dollars in revenue for every dollar spent on advertising.
Now that you know what is ROAS, let’s examine it against another key metric – return on investment.
ROAS vs. ROI: What’s the Difference?
ROAS is often used interchangeably with another metric called return on investment (ROI). While both metrics measure the effectiveness of marketing efforts, ROAS specifically focuses on the return generated from advertising spend, while ROI looks at the overall return on all marketing and operational expenses.
Simply put, ROAS helps you understand how much money you are making for every dollar spent on advertising, while ROI gives a broader view of the profitability of your business.
Why Is ROAS Important?
A higher ROAS indicates that your advertising efforts successfully drive revenue and bring in a positive return on investment. It helps you determine the most effective ad campaigns and channels and where to allocate your advertising budget.
Optimizing your ROAS can benefit your business in multiple ways, including:
• Increased Profitability: A higher ROAS means you generate more revenue from your advertising efforts, increasing profits.
• Cost-Effective Targeting: By understanding which campaigns and channels have a higher ROAS, you can focus your advertising efforts on those that bring in better returns.
• Better Decision Making: ROAS or return on ad spend provides valuable insights into the performance of your advertising campaigns, allowing you to make data-driven decisions for future marketing strategies.
• Boosts Lifetime Value: When you can target and convert the right customers, your ROAS can improve over time, leading to higher customer lifetime value (CLV).
• Lower Cost-Per-Acquisition: With a high ROAS, you can bring in more customers at a lower cost due to the effectiveness of your advertising efforts.
How To Calculate ROAS
There are three main steps on how to calculate ROAS:
1. Determine Revenue Generated: Add up all the sales or conversions generated from your advertising campaign. The two basic ways to track revenue are tracking codes or conversion pixels.
2. Calculate Advertising Spend: Add up all the costs associated with your advertising campaign, including partner and vendor costs, affiliate costs, clicks and impressions.
3. Use the ROAS Formula: Once you have both figures, divide the revenue generated by the advertising spend to get your ROAS. The return on ad spend formula will look like this.
ROAS = (Revenue generated from advertising/Advertising cost)
For example, if you spent $500 on advertising and generated $2000 in revenue, your ROAS would be 4:1.
You can also frame ROAS as a percentage by multiplying the above result by 100. In this case, your ROAS would be 400% or $4 in revenue for every $1 spent on advertising.
What Is the Ideal ROAS?
The ideal ROAS for your business will depend on various factors, including your industry, target audience and profit margins. For most industries, 4:1 is considered the break-even point, meaning you generate $4 for every $1 spent on advertising.
Obviously, this result may vary depending on the industry, the specific company and the business size. While some businesses can be profitable with an ROAS of 1:1, others may aim for a higher return on ad spend ROAS like 10:1 to maximize their profits.
Tracking your ROAS over time and comparing it to industry benchmarks is important. This will help you understand what is considered a successful return on ad spend in your specific market and set realistic goals for your business.
Limitations of the Return on Ad Spend Formula
While the ROAS formula provides a helpful metric for evaluating advertising performance, it shouldn’t be the only metric you should consider. Some of the limitations of ROAS return on ad spend include:
Attribution Complexity
ROAS calculation assumes a straightforward relationship between ad spend and revenue. However, in reality, customer journeys are complex. Customers may interact with multiple touchpoints (e.g., ads, social media, email) before purchasing.
ROAS return on ad spend doesn’t account for the entire customer journey or give credit to all contributing channels.
Time Frame Consideration
Return on ad spend ROAS provides a snapshot of performance during a specific period (e.g., a month). It doesn’t consider long-term effects or delayed conversions. For instance, a user might click an ad today but make a purchase next month.
ROAS calculation wouldn’t capture this delayed conversion, leading to an inaccurate representation of advertising effectiveness.
Inaccurate Profit Margins
ROAS does not incorporate accurate profit margins. If your margins vary across products or services, ROAS may misrepresent profitability.
Factors Affecting Return on Ad Spend
Several factors can affect your return on ad spend and make it vary from campaign to campaign. Some of these include:
• Ad Format and Placement: Different ad formats (e.g., display, video, search) perform differently, as do different placements on social media or search engine results pages.
• Target Audience: Your target audience’s demographics, interests and behaviors can influence their response to your advertising efforts.
• Seasonality: The time of the year can significantly impact consumer behavior and, consequently, your ROAS. For example, businesses may see higher sales during holiday seasons, resulting in higher ROAS.
• Bidding Strategies: Different bidding strategies (e.g., manual, automatic) yield different results.
• Creative Quality: Your ad creative’s quality, messaging and design can influence ad performance.
• Ad Testing: Regular testing of different ad elements (e.g., copy, visuals, call-to-action) can help optimize ROAS.
• Price Points: The price of your product or service can impact how profitable your advertising efforts are. If you have a high-priced item, you may need a higher return on ad spend (ROAS) to make it worthwhile.
How To Improve Your ROAS
If your paid advertising is not producing a positive return on ad spend, here are some strategies you can implement to improve it:
Keyword Optimization
Ensure that your ad campaigns target keywords directly related to your product or service. Use tools like Google Keyword Planner, Ahrefs or SEMrush to identify high-performing keywords.
Use Negative Keywords
Negative keywords are the words or phrases you don’t want your ads to appear for in search results. By using negative keywords, you can exclude irrelevant or low-converting keywords to prevent wasting ad spend.
For example, if you’re selling premium products, exclude terms like “cheap” or “free” so your ads don’t appear for users looking for budget-friendly options.
Segment Your Audience
Audience segmentation divides your audience based on demographics, behavior, interests and intent. It allows you to serve ads based on search intent or target customers most likely interested in your offerings. This can lead to a higher return on ad spend since you’re focusing on potential high-value customers.
Leverage Custom Audiences
Custom audiences are another way to segment your audience based on previous interactions with your brand (e.g., website visits and email opens). Using custom audiences allows you to reach people who have already shown an interest in your business.
Optimize Ad Copy and Creatives
Write persuasive ad copy that highlights the benefits of your product or service. Use action-oriented language and a clear call-to-action (CTA) to encourage users to click on your ad.
You should also invest in high-quality visuals. Images or videos that resonate with your target audience can significantly impact click-through rates and conversions.
Focus on Landing Page Experience
Your landing page is critical in conversion rate optimization (CRO). Ensure it’s optimized for usability and provides a seamless user experience from ad click to conversion.
Moreover, make it easy for visitors to take the desired action (e.g., sign up, purchase, download) by using clear, compelling CTAs and reducing any potential friction on the page, such as long forms or slow loading times.
Continuously Monitor and Optimize
Monitor your campaigns regularly to get the most out of your ad spend. Identify which campaigns, keywords and targeting strategies drive the best results. Use this data to make informed decisions on where to allocate more budget and optimize underperforming areas.
Conduct A/B Testing
Base your eCommerce optimizations on data, not assumptions. Experiment with different ad variations, headlines, images and landing pages. Continuously conducting A/B testing allows you to make incremental improvements that can significantly impact ROAS over time.
Allocate Budget Based on ROAS Calculation
Allocate wisely by distributing your budget based on performance, investing more in campaigns that yield higher ROAS and adjusting spending for underperforming ones.
Additionally, consider dayparting, a strategy that involves analyzing when your audience is most active and allocating the budget accordingly. For example, if evenings perform better, focus your spending during those hours.
Remarket to Previous Visitors
Remarketing allows you to re-engage with users who previously visited your website without making a purchase. These individuals already know your brand and may convert faster than new visitors.
Other Metrics To Track Beyond ROAS
As mentioned above, there are limitations to ROAS as a standalone metric. To get a complete picture of your advertising efforts, consider tracking other metrics such as:
• Click-Through Rate (CTR): The percentage of users who clicked on your ad compared to the number of times it was shown.
• Cost per Acquisition (CPA): The average cost you pay for each conversion.
• Customer Lifetime Value (CLV): The total revenue a customer generates throughout their relationship with your brand.
• Return on Investment (ROI): The overall return from your advertising efforts, including costs and revenue generated.
Turn Your ROAS Around With a Paid Advertising Agency
You’ve checked all the boxes and implemented all the strategies above, but your ROAS still isn’t improving. Consider partnering with a paid advertising agency.
Thrive Internet Marketing Agency conducts campaign audits, optimizes paid campaigns and provides data-driven insights to improve ROAS continually.
As a full-service digital marketing agency, we offer comprehensive paid advertising services, including social media advertising, search engine marketing (SEM), content creation and web page optimization.
Contact us today to learn how we can help you achieve a higher ROAS for your paid advertising efforts.
