Marketing is creative and fun, but does it pay off? There is so much competition out there on the web. So how do you know marketing is truly helping your business stand out?
It always comes back to data:
Return On Ad Spend (ROAS) is a less popular but extremely useful key performance indicator (KPI). It helps you track the success of your advertising endeavors.
In this article, we will cover:
- What this indicator is.
- How to calculate ROAS.
- How to interpret the results.
And, if you’re unhappy with your ROAS results, we have a solution. Read on to find some useful tips on what you can do to improve your ROAS.
What Is ROAS?
The goal of any business is to be as efficient as possible. The same goes for marketing.
To know if marketing is driving real business results, there are many KPIs to help us measure our performance.
ROAS, AKA Return On Ad Spend, indicates the amount of income your business got from each dollar invested in a marketing campaign. Put simply, this indicator measures the actual efficiency of your marketing campaign.
According to these statistics, in the U.S. in 2018, each dollar invested in digital search advertising returned as $11.05 in profit, which shows that the digital realm is one of the most fertile grounds for advertising, compared to other channels such as radio or TV.
How to Calculate ROAS?
The ROAS formula is quite simple. It’s the ratio between:
The amount of revenue generated following the launch of a campaign.
The total amount of money invested in that campaign.
ROAS = Generated revenue total cost of advertising campaign.
For example, you invested $1,000 in your campaign, and it created $4,000 of additional revenue next month (or whatever time period you choose as indicative). According to the ROAS formula, you got 4x your investment.
There are many free online ROAS calculators you can use to speed up the calculation process. Also, you can use Google spreadsheets or similar software to quickly create your own ROAS calculator.
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Why Does ROAS Matter?
Put simply, ROAS is there to calculate your ad return, telling you how efficient your strategy is in terms of the most important thing: revenue.
If the resulting value is high enough, that means your endeavors have been fruitful. It indicates that customers increasingly buy your product(s)/services(s) thanks to your campaigns. You’ve found a way to successfully bridge the gap between the customer and the product and did so at a reasonable cost.
What Makes For A Good ROAS?
The answer to this question will be as unique as the brand running the calculation. There are broad recommendations and best practices, but ultimately you will have to determine the value based on your particular case.
In general, 4 is considered to be a common benchmark for this indicator. This would mean that each dollar you invested in marketing brought $4 to your company in profit. Of course, the higher the number the better.
There are two major factors that determine a satisfying ROAS value:
- Business size: For smaller companies, a value of 2 can be great, while bigger ventures may want to reach a number of 8 or greater.
- The goal of the marketing campaign: You may tolerate a lower ROAS if your campaign is focused on raising brand awareness rather than selling a particular product.
In any case, make sure your value is not lower than 1, which means you’ve actually lost money on the campaign in question. A ROAS lower than 1 calls for immediate action.
ROAS vs. ROI
Usually, when we think about revenue efficiency, we think of return on investment (ROI). As anyone with minimum experience in the economy knows well, ROI is the ratio between the investment cost and the profit earned from it.
What’s challenging is that ROI doesn’t always differentiate between the types of costs. It is used to track the total cost-benefit rate and not the efficiency of marketing, which is only one part of investment costs. That is why we use the ROAS indicator.
Often, both of these metrics are used at the same time to evaluate the success of a particular campaign.
Not To Be Confused With ROA Calculation
Another indicator that can easily be confused with ROAS is Return on Assets (ROA).
The ROA calculation is usually expressed in percentages and tells how good a business is at capitalizing on its resources. What is a good ROA? Of course, higher is better, but somewhere between 5 and 20% is usually considered acceptable.
If the ROA calculation shows anything below 5%, it is a warning sign that the venture might have some financial issues to work on.
5 Ways to Improve Your Return On Ad Spend
In case your ROAS calculation result is lower than 1 or is in any other way unacceptable for the business, there’s always something to be done. Here’s a quick checklist on what might be the problem and what could be done to save the day.
1. Get the Right Data
A ROAS formula needs only data on revenue generated and money spent for a marketing program. The hard part is to make sure these numbers correspond to reality, which can be tricky.
The reason behind this is that marketing is getting complicated. Regarding the investment costs, are you sure you included all of the charges, even the indirect ones? Remember to incorporate both offline and online advertising costs.
Revenue can be even more complex to track. For example, did you remember to include offline sales? Do you know exactly which ad led to a purchase? Employing some attribution models in your ad analytics might be helpful to fully understand your customers’ purchase cycle.
Let’s say you base the effectiveness of your ad on the last click the customer made before buying a product. This is what most marketers do, but it doesn’t have to be the case. Maybe the decision to purchase the product was made before the last click, with some other ad, and on a different device?
That can be an important set of information in evaluating the performance.
Therefore, if you want your ROAS calculator to yield useful information for your business, you have to make sure the data you enter is accurate.
2. Boost Ad Revenue
How do we earn from Google ads? We define the keywords essential for what we are promoting and then decide on a bid strategy that will hopefully result in clicks and/or purchases.
Unless automated, both keyword choosing and bidding strategies are, basically, a lot of guesswork. Wrong guesses happen and might lead to poor ROAS calculation results.
However, what has been done can easily be undone. Try out the following tips to boost ad revenue:
- Opt for other keywords and try to find those with a better balance of relevance and competitiveness.
- Regarding the keyword choice and bidding strategies, you could consider employing a third party that could help you automate the process. These agencies will probably have tools that enable them to know tricks on how to diversify the campaign.
3. Cut Expenses
There are some simple steps you can take to cut the expenses and boost your Return On Ad Spend indicator. Try the following:
- Redefine and narrow your target audience.
- Focus on retaining your existing clients instead of obtaining new ones.
- Use negative keywords. You might want to use negative keywords if you notice that there is a word that leads customers to your product even though it actually isn’t what they’re searching for. For example, if you’re selling running shoes, you want your ad to target people who need sports shoes, and avoid people who search for “high-heeled shoes” or “fishing shoes.” In that case, you will enlist “fishing” and “high-heeled” among the negative keywords for your campaign. This helps with targeting the audience in a much more precise way.
- Use free open-source instead of paid subscription software.
4. Personalize the Experience
People are different, so ads need to adjust to diverse audiences. If your campaign doesn’t sell as you would like it to, it could mean that you need to address different audiences in unique ways.
Try to revisit your market research and better understand your audience segments. Only then will you be able to adjust your campaign accordingly. Tuning your message to what’s most relevant to your various audiences will most certainly help you increase sales.
Need some inspiration? There are some great examples out there.
One of them is Shutterfly, a site where one can create designs for canvases, photo books, calendars and more. Once a customer downloads the Shutterfly app and allows access to their phone’s photo gallery, the app automatically displays ads with the personal photos as already printed on mugs or calendars.
In such a way, Shutterfly successfully uses access to customer data to customize ads and promote its offer in a more personalized way.
Companies such as Netflix, Amazon and Starbucks also continue to rely on personalized marketing techniques, using algorithms to show personalized content to customers.
5. Look at the Bigger Picture
Even if the ROAS formula shows a low value, sometimes good news can hide behind bad results. It might happen, for example, that your sales were actually boosted, but ROAS is still low. That might indicate your prices are too low and there is room to raise them.
On the other hand, if your click-through rate (CTR) is too high but sales are low, it means that people are interested but give up before completing the transaction. Therefore, make sure your copy is straightforward, website UX design is intuitive and the purchase process is simple.
Also, don’t forget to keep track of your competition. A simple marketing SWOT analysis focused on ad campaigns could be helpful here.
If you post your ads on Facebook, remember to manage Facebook ads comments. You may lose potential clients if you leave them without answers.
ROAS: Final Thoughts
Properly tracking the efficiency of your marketing campaigns is key to the success of not only the current campaign, but future ones as well. Remember that ROAS is not here to indicate your failures — on the contrary, it’s here to help you prepare for whatever’s on the horizon.
And that can truly make a difference to your bottom line.