The marketing world is being increasingly inundated with data. Marketers are constantly trying to find novel ways to reach their customers, and improve customer interactions. In the paid search domain, metrics such as quality scores, click-through rates, cost per conversion, are often in focus. But sometimes, marketers get lost in the nitty-gritty, losing out on the holistic picture.
Online advertising is a tricky domain. You have many ways you can capture the customer’s interest. There are only so many customers who will be interested in interacting with your brand. In order to know where to spend your precious marketing budget, you need insights. There are hundreds of metrics you can get lost in, but ROAS, which is often ignored, can give you a bird’ eye view of what’s happening with your conversions. Find out how much revenue your conversion actions are generating.
What Is ROAS
An acronym for Return on Ad Spends, this marketing metric gives you your business revenue amount for each dollar you spend on ads. ROAS is like a return on investment, only this is in digital advertising. ROAS measures your advertising efforts, analyzing how effectively your message is connecting with your prospective audience. A high ROAS is good, the more your prospects, the more revenue earned, from each dollar spent on an ad. ROAS can be measured at different levels, within a Google Adwords Account, at an account, campaign, or ad group level. You can calculate ROAS based on the knowledge of spending and earning at any particular level.
To put it simply, you measure the amount of revenue earned for each ad dollar spent. The ROAS of an entire marketing budget or of specific ads or campaigns too can be carried out.
How is ROAS Calculated
- A simple yet powerful metric, ROAS is quite easy to calculate.
- Take your total conversion value. Divide this by your advertising costs.
- The result is your ROAS.
Conversion value refers to the earnings from any given conversion. For example, if you spent 10 dollars on ads, to sell one unit of a 200 dollar product, your ROAS is 20 dollars.
Other Elements to Consider
3rd party partners or vendors who work on the campaign, or assist at channel levels need to be accounted for together with other in-house advertising personnel expenses, like paychecks, etc. If this data is not accurate, ROAS will not be useful as a metric.
Network transaction fees as well as affiliate commissions come under this umbrella.
Now, ROAS is sometimes pitted against CPA, or cost per conversion, as a good tool to determine the success of a paid search campaign. CPA gives you the average cost associated with any single action. Not all conversions are equal. This is where ROAS can help.
Let us consider two ad groups, A and B.
- A has an ad spend of $100, with 1 conversion, and a CPA of $100, which means their revenue is $50, and ROA is 0.5.
- B has an ad spend of $100, with 1 conversion, a CPA of $100, with revenue being at $300, and ROAS being at 3.
Now, while you might be wondering how each ad group has spent the same amount of money, get one conversion, and the same costs per conversion, of $100.
However, upon evaluating the conversion value individually, the picture is different. One ad group has generated $50 after spending $100, and the other has generated $300, with the same spend. That is quite a big difference. Getting a ROAS less than 1 is poor, as you are earning less than a dollar for every dollar you spend, a financial drain. A ROAS of 3.0 shows that for each dollar spent on ads in that particular group, 3 dollars were earned back – a return of around 200%. If your aim is to make profits, you should aim for as high a ROAS as possible. A good benchmark is between 3 to 4 so try and either hit that target or exceed it if possible.
Why Is ROAS Important
If you want to quantitatively evaluate the performance of your ad campaigns, and find out how they are impacting your e-commerce bottom line, you need cross-campaign ROAS insights so that you can combine them with customer lifetime value, to determine strategy, chalk out budgets and steer your marketing direction. Keeping a watch on your ROAS can help you make informed decisions regarding investing precious ad dollars.
How Do You Improve Your ROAS
The data used to calculate ROAS needs to be accurate and all-encompassing, without being vague. Consider all advertising costs, including offline sales and other indirect sources of revenue. Be careful to leave out other unrelated costs like order fulfillment, etc.
Lower Advertising Costs
Lowering campaign costs can help you boost your ROAS. If you are teaming up with an agency, try in-house methods instead. Stack up on negative keywords so you don’t waste your budget. Work on your quality score, ensuring your ads are relevant to the target keywords. Whittle down your target audience, so you can reach them with specific campaigns. Finally, run automated tests to see whether your approach is working, using those insights to cull methods that are stalling your progress.
Maximize Ad Revenue
Constantly prune your keyword list, target those with less competition so your ad can get more clicks. Adwords users can take advantage of Google’s automated bidding strategies to decide on a ROAS.
Never Neglect Non-Advertising Issues
Sometimes, indirect issues can affect your ROAS. High sales and a low ROAS mean your product has been underpriced. Conversely, a low ROAS and a high CTR could mean that the ad copy is ambiguous, the landing page is poor, the checkout process is confusing or the product is overpriced. From improper keywords to faulty demographic targeting, there are many reasons for a low ROAS.
Challenges Faced By ROAS
There are certain challenges associated with ROAS. Ad revenue is not considered an economic benefit, but a vanity metric that massages the company owner’s ego, without contributing anything solid to long-term business. There are other metrics like Contribution Margin, which is the result of revenue minus variable costs. Having said that, ROAS in combination with other data can help marketers arrive at logical business decisions.
In conclusion, ROAS is a powerful metric that can give digital marketers powerful insights into ad campaign efficiency. Clubbed with similar metrics, ROAS can help you decide whether your current campaign results are good. A low ROAS is indicative of some much-needed change, either to your campaign settings, the ads, or your landing page. Marketers running paid ads need to track their ROAS to constantly ensure revenue optimization from each dollar spent on an ad. Read our blog on the main components of a quality ad to craft the best ads for your customers.