If you’re a digital marketer, return on ad spend (ROAS) is one of the most impactful metrics you’ll need to get familiar with. It shows how effectively you’ve communicated your advertising messages to your target audience and informs your budgeting of future spending, so maximizing your ROAS should be a key objective in your marketing arsenal.
Will you go with a Google display campaign, LinkedIn carousel, or Facebook? How many landing pages should you create? How many team members need to be hired to get the job done? All these budgeting and planning questions depend on your ROAS metrics.
So let’s dig in to what ROAS is and how you can use it to guide the growth of your marketing strategies.
What is ROAS?
ROAS tells you how much revenue your campaigns are generating for every dollar spent. The beauty of this metric is that it reveals more insights than what you’d get if you only tracked costs per click (CPC). Insead, ROAS calculates conversions for ad spend, so you gain more visibility into the effectiveness of your marketing efforts.
ROAS is derived by a simple calculation: Divide total revenue by total cost like this:
You can employ the metric at various marketing levels. For instance, you can calculate ROAS for a series of ads, a brand-focused campaign, or quarterly budgets.
Here’s an example: Let’s say an ecommerce clothing brand’s campaign generates $40,000 and spends $10,000. Dividing revenue by cost, the brand’s ROAS is 4. That means that for every dollar spent, the company made $4.
What is a good ROAS?
There is no definitive “good” ROAS. Just as conversion rates vary across industries and channels, so does ROAS. Marketers must decide what is optimal for a brand based on a host of variables, such as resource availability, competitive threats, the newness of channels, and market activity. For some brands, a value of 4:1 is outstanding, while for others, it would be considered a failure.
You can get an idea of this variance by looking at average conversion rates across some of the big channels. For example, the average conversion rate of Google Ads users running search ads is 4.40%, while it’s 0.57% for display ads.
For Facebook users, the average conversion rate climbs up to 9.21%.
ROAS? ROI? What’s the difference?
Another metric closely related to ROAS is return on investment (ROI). While marketers often use the two terms interchangeably, each measures revenue a little differently, and so it’s important to know which metric to use as you gauge the effectiveness of your campaigns.
ROI is a percentage that measures how expenditures compare to your business’ bottom line, your profit. Advertising ROI is calculated by dividing a business’ net profit by advertising costs and then multiplying by 100. To calculate ROI, use the following formula:
We’re not saying ignore ROI. All marketers must track it to understand the financial health of their businesses. However, it’s limited in its ability to inform marketing strategies compared to ROAS, which specifically examines advertising revenue.
What do you do about low ROAS?
Now let’s say you’ve calculated the ROAS for your campaigns and discover a disturbing revelation: Your ROAS isn’t where it needs to be. Here are some ways to diagnose what could be causing the problem.
If your CPC is too high, you’re sending too much money from the get go. Are you choosing highly competitive keywords? Or bidding for a top position in search results?
To figure out if there’s a way to reduce your CPC, first try to figure out why it’s higher than it should be. Here are some common issues that negatively impact ROAS—along with tips for improvement.
1. Your Google Quality Score is low
One of the fundamental factors that determine ROAS is your Google Quality Score, which measures your ads’ quality compared to other advertisers. Google measures your score on a scale from 1 to 10, based on your click-through rate (CTR) and the relevancy of the keywords you’ve selected. From Google’s perspective, the more useful your ads are to those searching for your keywords, the higher your quality score will be.
It’s hard to overstate the importance of boosting Quality Scores. There are 3 wonderful benefits of achieving a high Quality Score: higher ad rankings, lower ad costs, and higher conversions. And all 3 of these factors affect ROAS.
Here are some tips to improve your Google Quality Score:
Increase your CTR: Use compelling ad copy that connects to the meaning of your keywords.
Optimize your landing pages for every device: Make sure your web design works with desktop computers as well as mobile devices.
2. Customers aren’t happy with the post-click experience
Ad campaigns aren’t only about clicks. You also have to examine the quality of your post-click landing pages and what the ad-to-page journey is like for your customers. Ensure your post-click experiences are relevant to your target audience by:
Establishing ad-to page relevance. In particular, pay attention to message matching between the design and content of your ad and post-click landing page. The copy, branding, and overarching message of both should work together. If customers feel confused or believe they’re on the wrong landing page, they’re likely to bounce.
Personalizing your ad campaigns. When you personalize pre- and post-click experiences for each audience segment that interacts with your ads and landing pages, you increase the chances of scoring advertising conversions. The more relevant, personalized, and optimized your experiences, the more likely you are to translate ad clicks into conversions. And the stats agree. A study by Econsultancy and Monetate found personalized web experiences generated, on average, a 19% uplift in sales. Now that’s a worthwhile investment.
Designing with a conversion-centered mindset. Your post-click landing page design shouldn’t just look pretty, it should enhance user experience, which translates into conversions. Use conversion-centered design principles to create pages that utilize effective visual hierarchy, have optimal contrast, and employ persuasive triggers to get visitors to convert.
3. Your offer needs work
A high conversion rate can seem like a panacea for any marketer, but conversion rates become a vanity metric if you don’t understand how they relate to profit. This is where Average Order Value (AOV) comes in.
Your AOV is the average amount your customers pay at checkout, and how much your customers spend at checkout determines whether you have a low ROAS or a high one.
You can run a quick calculation of your AOV for different time periods or different channels by dividing the total revenue by the number of orders. By increasing AOV ecommerce brands increase their ROAS. The higher your AOV, the more you are getting out of every customer—and as a result, out of every dollar spent to acquire those customers.
When optimizing your ROAS, look at your offer itself. The problem may not necessarily be how you’re marketing your product but how you’re pricing it. Your average order value (AOV) could be an indicator that the offer needs to be adjusted. Here are some ways to change up your offers:
- Use upsells and cross-sells: Present related offers before and after your customer makes a purchase.
- Bundle offers: Package several related offers, discounting each item.
- Leverage email marketing: Build brand familiarity by sending customers a series of emails that inform them about your offer.
Now that you know what needs to be done for a low ROAS, read more about all the techniques you can use to significantly increase the metric for your brand in, “7 Proven Ways to Improve Your ROAS Performance.”
Don’t settle for a low ROAS
ROAS is a vital growth metric to track and continually improve—the higher your ROAS the more efficiently you’re spending your advertising budget.
If your ad campaign costs too much or doesn’t produce enough revenue, your returns may be negligible. But it doesn’t have to stay that way. Instead of giving up on your campaign, take the time to optimize your cost per click, conversion rate, and average order value, and you’ll be rewarded with a higher ROAS.
Receive a free conversion-rate analysis
Do you have questions about ROAS and how to improve yours? Let Postclick perform a free analysis of your ad campaigns. We’ll provide a report that gives insights to their post-click health, compares your site against industry and competitive benchmarks, and identifies opportunities to increase conversions. Request your free analysis here.