In marketing, it’s important to optimize your campaigns to ensure that you are making the best investment of every single marketing dollar. The way that is tracked can vary, and some methods are more effective than others. For years, so many marketers and advertising professionals focused on ROI, or return on investment, which is useful, but may not be the best way. It’s certainly not the only way.
In the past few years, ROAS has become a buzzword in the marketing world. For those who hate math, it’s another analytic that might seem like a hassle. However, for those who want to know what’s going on in their marketing, it’s a must.
In marketing, competitive data is how we live and breathe. Finding ways to improve metrics is always on our radar, but too often, people focus on the details. When you scroll out and look at the big picture, however, you can find some great metrics to help with valuable insights. ROAS is one of them. Read on to learn all about this metric and what it can do for your marketing.
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ROAS stands for Return on Ad Spend. This helps you see what is leading to conversions, as well as how much revenue the actions are generating. This accounts for the amount of revenue that your business will earn for each dollar spent on advertising. It is typically expressed as a ratio, and although it’s quite similar to ROI, it is not the same.
At a very basic level, ROAS is responsible for measuring the effectiveness of ad campaigns. The higher it is, the better your marketing is doing. The good news is that while it might sound complicated, it’s fairly simple to calculate your ROAS. You can measure it in a variety of ways through Google Ads accounts, but we’ll get to that in a little bit. For now, let’s stick to the basics.
To calculate your return on ad spend, you simply divide your conversion value by your cost. For example, if you spend $10 on an ad and it earns you a sale of $75, your ROAS would be 7.5.
Return on ad spend can be combined with your customer lifetime value insights to create effective insights to inform future marketing strategy, budgets, and overall direction. This helps companies make more informed decisions about exactly where and how to invest their ad dollars for maximum profits and efficiency.
It’s important when calculating ROAS, just as with other revenues, to include any partner and vendor costs, affiliate commissions, and any impressions or clicks that you’re paying for. Subtract those from your sale or profit and you’ll get the right revenue amount to divide by the ad spend to determine the ROAS.
Return on ad spend can be combined with your customer lifetime value insights to create effective insights to inform future marketing strategy
Some companies may have a different need in terms of ROAS to remain profitable. Others may just be striving to maximize their marketing spend. For example, while one company may need a ROAS of 8.0 to stay in the black, another company might be fine at 3.0, but aiming for 5.0 or 6.0 just to pad the bottom line.
Cost-per-ad/conversion, or CPA, is one of the most common metrics that a lot of marketers use to determine how successful their paid search campaigns are. While this is valuable to help measure the conversion volume, it doesn’t cover the big picture. It only measures a cost related to a single action, and therefore can’t give you as much insight as ROAS.
You can have two campaigns that have the same ad spend and cost per ad, with totally different revenues based on the product or service being sold. Thus, while your CPA matches up and makes you think the campaigns are equally effective, the ROAS will show you there’s a significant difference in your returns, and that you may want to rethink the campaign that is costing you valuable returns.
If you’re creating a profit-driven marketing strategy, your goal should be to have a ROAS that is as high as possible. Typically, benchmarks are between 3.0 and 4.0, so you’ll want to set goals to meet or exceed those numbers. Our example above was a little on the high end, but it was just for the sake of explaining the conversion formula.
Return on Investment, or ROI, is different than ROAS. Some people think it’s just a matter of semantics, but it’s more than that. Here’s the fundamental definition of each, which clearly expresses the difference.
ROI: Your return on investment refers to the amount of money you earn after paying expenses. This takes the price paid for the ad, subtracts your expenses, and gives you a total amount that you earn from each ad. The goal is to help you determine whether or not the campaign is a worthwhile investment.
ROAS: This is a ratio derived from comparing how much to spend to how much you earn. This is measured in terms of revenue earned for each dollar spent on advertising. The goal of ROAS is to determine how well you are maximizing your marketing dollars in terms of revenue and how you can improve that based on specific campaigns.
This is a much more versatile metric because it allows you to evaluate all kinds of aspects of your digital marketing campaigns. You’ll be able to look at one ad set to see which need more spending and which ones are performing optimally. You’ll also be able to see which campaigns might need to be scrapped because even though they’re converting, they’re costing you money in the end.
Essentially, this metric measures all things that are critical to sustaining your marketing, while guiding you toward areas of improvement so that you can make the necessary changes.
If you’re considering adding this metric, but still not sure how you feel, we’ve got some considerations to help you out. For starters, let’s look at the advantages of measuring your ROAS instead of (or in addition to) your CPA and ROI:
- Exact revenue calculations that may be overlooked in CPA and ROI
- Focuses on big-picture marketing rather than individual ad spend
- May identify inconsistencies or losses that aren’t found with other data
- Helps prioritize campaign spending based on which ones are most profitable
- Can even hyper-focus on keywords or ad groups
ROAS gives you a much more focused, direct look at not only how things are performing and what kind of profits you are earning, but how you can go about making small changes (or big ones) to increase that revenue. That kind of insight is going to be invaluable.
As for cons, there aren’t any to mention. The formula is simple, the analytics tools make it easy, and the insight is invaluable to your business. Sure, it’s one more thing to keep track of, but remember it’s for the benefit of your bottom line.
There is no single way to improve your revenues or ad successes. However, the process starts by reducing your ad spend and increasing your revenue or one of the two. Doing this, of course, can prove to be a bit of a challenge. It would be an entire guide of its own to discuss all the optimization possibilities for your ad campaigns, but for now, we’ll go over a few of the highlights.
- Focus on the Buyer: In all marketing and ad choices, you need to keep the user journey and buyer persona in mind. Their journey starts with a click, but that is only the beginning. Make sure that your ads reach targeted buyers, and that your campaigns are optimized for the right audiences.
- Create Mobile Ads: More than 75% of all Internet searches are performed from smartphones or tablets. If you’re not optimizing your ads for your mobile audience, you’re not getting the revues or conversions that you could. You need to create ads specifically for mobile devices and make sure that you use mobile search filters like distance, location, or business hours when you can to cater to local searchers.
- Adjust Bids: You can adjust your paid ad placements by the time and location, as well as by their device, to help reduce the cost of the ad spend. Choosing ads in less popular time slots or on different devices could reduce your spend or increase your profits, which both improve the ROAS in the end. By making minor adjustments to where your advertising dollars are allocated, you can make big improvements to your revenue.
- Watch the Competition: If your competitors are investing in paid campaigns and doing well (or not), you can take advantage of that insight. Spy on what others are doing and what’s working and see how the biggest names in the eCommerce world are generating business with paid marketing. Marketing isn’t reinventing the wheel—it’s figuring out how to make the wheel work best for you. That includes taking notes from those who come before you.
These are just a few of the best ways to improve your ROAS. Of course, taking the time to reassess your marketing strategy will give you the chance to make a lot of tweaks and improvements along the way. And as always, the best thing that you can do is work with a professional digital marketing expert who can help you make the right moves for your bottom line.
When you want to optimize for ROAS, it’s fairly simple, thanks to Google Ads. You’ll be able to measure it at the account level, the campaign level, or even by ad group or another parameter. In any area where you know what you’re spending and earning, you can determine what your ROAS is going to be.
When you have a larger campaign, you might want to split it into more segments and groups that give you more context or help break down your spending in a better way so that you can create better returns. Of course, you’ll have to look at the campaigns that are costing the most and make sure that they’re getting the best returns first and foremost. Optimizing lower-performing campaigns is fine, but it’s not the best way to make an impact.
By calculating ROAS at multiple levels through your Google Ads account, you’ll be able to get both a big picture and granular look at your ad spend and how much revenue you’re actually earning.
- Create ad groups for broad product categories
- Split products out into separate groups
- Use exclusions for ads that don’t fit into certain groups
- Review your account and make sure everything is in order
- Check for other related metrics that you can improve or implement
If you’re not tired of math by this point, there are a lot of great numbers that you can glean from your Google Ads account to ensure that you’re maximizing your ad dollars in every way possible. There’s a difference between making conversions and making profits. A $300 CPA for one company might be a fractional cost, while for others, it could be their top dollar. When you are looking at the right data, you’ll be better able to understand how to maximize your revenue.
Implementing the analytics to track your return on ad spend along with your ROI is not a complex process. Many platforms like Google Analytics have tools and functions to help generate these reports and calculate the exact return that you’re getting on every single marketing dollar spent in terms of revenue. However, it might still be something that you could use a hand with.
ROSAS is incredibly useful when determining the results of your advertising campaign and is a far better metric than CPAs. In the end, you want the best and most significant metrics to make sure you are getting the required return on your advertising investment.
Luckily, there are new tools available to make sure that your returns on ad spend are where they need to be or provide additional information about how to improve your returns in the most effective way possible.
If you’re ready to up your analytics game and start tracking your revenue from ad spend, reach out now. We’ll help you implement the solutions you need to take your business to the next level.
About the Author
For over 25 years, Jay Sung has been a passionate leader in driving sustainable growth through direct-to-consumer, e-commerce, and customer acquisition strategies. Mr. Sung oversees corporate branding and growth initiatives utilizing a continuously evolving toolkit of digital marketing strategies and technologies to drive innovative direct marketing programs for portfolio companies – from startups to Fortune 500 organizations.
Previously, Mr. Sung served as the Chief Marketing Officer for Guthy-Renker, a $1.3 billion industry leader in the direct-to-consumer health and beauty market. He is best known for developing consumer acquisition and marketing strategies for leading brands such as Meaningful Beauty® with Cindy Crawford, Wen® Haircare by Chaz Dean, IT Cosmetics™, and many others. In addition, he served as the CEO of such well-known brands as The Proactiv Company and Lot18.
Mr. Sung lives in Los Angeles, enjoying all Southern California has to offer. You’ll frequently find him reading the latest business journal, cooking, or practicing the piano to relax. Mr. Sung earned his Bachelor of Science degree in economics with a double concentration in marketing and accounting from the Wharton School at the University of Pennsylvania.