Have you read Moneyball, or watched the Brad Pitt film based on the Michael Lewis bestseller?
Here’s a quick rundown.
The book narrated how the Oakland Athletics used an unconventional way to build a winning baseball team with meager resources. They did this by using carefully chosen statistics instead of relying on talent scouts.
Though the book is about pro baseball, it has a valuable advertising lesson that’s still relevant today: It’s much easier and faster to achieve success when you use the right metric.
This brings us to the ongoing debate about which metric to use when analyzing advertising campaign performance — return on ad spend vs. return on investment. Sure, ROI has been an essential metric for evaluating success on digital channels. However, many brands are now relying on ROAS to guide their digital strategy.
Though both metrics measure growth, they determine advertising profitability from different perspectives. Figuring out which to use when is vital to increasing your advertising success.
What is ROI?
ROI measures how ad expenditures contribute to a business’ bottom line. The metric evaluates the return on a particular investment, relative to its cost. In other words, it’s a ratio between your net profit and investment.
To calculate ROI, use the following formula:
One thing to note is that return on investment takes earnings into account only after deducting expenses.
Let’s say you have a product that costs $200 to produce, and it sells for $300. You sell eight of these products with Google Ads. Your total sales amount to $2,400, but your advertising costs are $200, with production costs of $1,600. You’ll then calculate your ROI as:
ROI = 600 / 1800 X 100 = 33%
ROI’s sole purpose is to determine whether a campaign is worth the investment. By taking the margin into account, you can assess overall profits and calculate the metric.
It’s crucial to track ROI for campaign performance. However, it isn’t a tell-all that will help you optimize your advertising strategy. It doesn’t help you determine if your ads and post-click landing pages are resonating with your audience.
That’s where ROAS comes in.
What is ROAS?
ROAS calculates the total revenue generated for a specific marketing campaign divided by the total campaign cost.
It shows how effectively you’ve communicated advertising messages to the target audience. The more relevant your ads are to your audience, the higher your return on ad spend will be:
For example, if a DTC furniture brand spends $20,000 on a Facebook ad campaign and generates $60,000 in revenue, their ROAS would be:
$60,000/$20,000 = $3 or 3:1.
Representing the metric in dollars will demonstrate if an advertising channel is performing at a level that will allow for profitability. You can also calculate it as a ratio to show revenue generated from each advertising dollar spent for a specific campaign.
In the DTC furniture example, a 3:1 return on ad spend means that for every $1 the brand spent, they generated $3 in revenue.
What is a good ROAS?
There is no such thing as a “good” ROAS, since there are different ways to look at the metric. For some brands, a ratio of 3:1 is outstanding. Others would consider this a failure. Comparing a good or bad ROAS depends on the profit margins of the offered product or service, the industry, and the advertising channel.
A significant profit margin shows you can afford a low ROAS. Conversely, a small margin means you need advertising costs to be low, so your goal will be a higher ROAS.
Just as conversion rates vary across industries, ROAS varies across different industries and channels.
Your campaign’s conversion rate helps predict the ROAS value. However, there is a distinction between the metrics–conversion rate measures action, not revenue.
ROAS vs. ROI?
The vital thing to remember in the ROAS vs. ROI debate is that it isn’t an either/or situation.
Whereas ROI helps you understand long-term profitability, ROAS looks at campaign-specific revenues, rather than profit, as it guides you in optimizing your short-term strategy. To create an effective digital advertising campaign, you’ll need to use both performance metrics.
ROI will give you insight into the overall profitability of your advertising campaign, while ROAS will help identify the exact strategies that help you generate more advertising conversions and revenue.
How to increase your ROAS
ROAS essentially consists of two things: your ads’ cost and the revenue they generate. To improve your ROAS, you must either reduce your costs or increase your revenue.
It’s also crucial to keep a check on your ROAS accuracy.
Lower ad costs
You can lower your ad costs and increase your ROAS with these tactics:
- Review negative keywords. Did you know an average Google Ads account wastes up to 76% of its budget on the wrong keywords? You can prevent wasting your ad budget by skillfully using negative keywords to refine your search terms.
- Improve your Quality Score. For Google Ads campaigns, a better Quality Score results in a higher ad ranking and a lower CPC. To achieve a higher Quality Score, you must improve your expected click-through rate, ad relevance, and landing page experience. To put things into perspective, this is how Quality Score affects your CPC:
Check your ROAS accuracy
One of the first things to do for a low ROAS value is to review your metrics. Have you considered all the advertising costs? Is your attribution model accurate?
First- or last-click attribution models can impact the metric since they can make a successful campaign look unsuccessful. For example, say you’re using a last-touch attribution model and a customer converts on your webinar landing page, attends the webinar, and replies to an email campaign where they accept a sales meeting. The email campaign will get 100% of the credit, which is not representative of the full customer journey. That’s why it’s vital to make sure your attribution model makes sense for your campaign.
Another essential aspect to check are costs outside of the immediate advertising costs since these can skew the final value.
Increase your ad revenue with relevant landing pages
You can increase your ad revenue by:
- Connecting your ads with personalized post-click experiences. Increase your advertising conversions by leading visitors to a relevant, personalized post-click landing page after the ad click. When intent and relevancy match audience expectations, you decrease your cost per click and increase your advertising conversions.
- Optimizing your post-click landing pages. Optimizing your page elements helps your users complete the conversion goal faster. Regularly A/B testing your pages helps you figure out what’s working and what’s not.
- Fostering an excellent user experience on your landing pages. A positive user experience helps you funnel visitors down your landing page to click your CTA button—increasing your conversions and your ROAS.
Partner with Postclick to maximize your ROAS
Partnering with Postclick gives you access to an expert advertising conversion team leveraging proprietary Post-Click Automation technology to turn advertising clicks into conversions.
As we already mentioned, ROAS reveals how effectively you’ve communicated advertising messages to your audience. The more relevant your message is, the higher your return on ad spend will be—and this is where Post-Click Automation (PCA) comes in.
With PCA, you can not only create hundreds of personalized landing pages, but also automatically optimize them for maximum advertising conversions. The result is lower costs and a higher return on ad spend.
Across our customers, we’ve seen at least a 25% increase in ROAS through improved ad-to-page relevancy.
Get your complimentary conversion analysis
We want to offer you a complimentary analysis of your ad campaigns. We will review your campaigns to analyze your post-click health, compare your site against industry and competitive benchmarks, and identify the most comprehensive opportunities to increase your ROAS. Our team will share insights on how we can increase your conversion rates, in addition to a comprehensive competitive analysis. Request your analysis here.