Digital advertisers track a lot of metrics to measure growth–conversion rate, total conversions, CTR, CPM, CPA–the list is long. One metric to never overlook especially with direct response advertising is return on ad spend.
In today’s advertising climate, monitoring the metric is arguably more important than ever. The amount of global digital ad spend will grow 2.4% this year. This is the first time there will be single-digit growth:
It’s vital to know how advertising campaigns perform compared to your spending. This is where the metric comes into play.
What is ROAS?
Return on ad spend calculates the total revenue generated for a specific marketing channel (such as PPC) divided by total campaign cost on the channel. More broadly, it shows how effectively you’ve communicated advertising messages to the right audience, the higher the message relevance to the target audience–the higher the return on ad spend.
Here’s the ROAS formula:
For example, if a DTC clothing brand spends $10,000 on a Facebook ad campaign and generates $40,000 in revenue. The formula is:
$40,000/$10,000 : $4 or 4:1
The metric is represented in dollars because it shows if an advertising channel is performing at a level that will allow for profitability. It is also calculated as a ratio demonstrating revenue generated off each advertising dollar spent for a specific campaign. In this example, a 4:1 return on ad spend means that for every $1 the brand spent they generated $4 in revenue.
With the metric, you calculate conversions for ad spend instead of simply tracking clicks. It reinforces the idea that clicks don’t equal conversions. The former may raise CTR, but conversions generate something in return for the budget you invested.
What is a good ROAS?
There is no such thing as a good ROAS since every brand looks at the metric differently. For some brands, a value of 4:1 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 big profit margin shows you can afford a low return on ad spend. Conversely, a small margin means you need advertising costs to be low so your goal will be a higher return on ad spend.
Just as conversion rates vary across industries, return on ad spend varies across different industries and channels.
Looking at available conversion data, advertisers struggle to reach audiences with meaningful content. This also has an impact on the metric. For Google Ads users, the average conversion rate across all industries is 4.40% and 0.57% for search and display, respectively:
For Facebook, the numbers are higher at 9.21%:
Your campaign’s conversion rate helps predict the value of return on ad spend. However, there is a distinction between the metrics–conversion rate measures action, not revenue in dollars.
Another metric closely related to ROAS is ROI and most advertisers use the two terms interchangeably. Both metrics deserve attention in the bigger advertising picture but measure different values.
ROAS vs. ROI
ROI measures the profit generated by ads relative to the cost of those ads. The metric measures how ads contribute to a brand’s bottom line. To calculate:
ROI = profits-costs x 100 / costs
While ROAS measures gross revenue generated for every dollar spent on advertising, ROI accounts for the amount you earn after paying expenses. The sole purpose of ROI 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.
ROI is important to track for campaign performance, however, it isn’t a tell-all. It won’t help you decide whether or not a campaign will be successful. Meanwhile, ROAS does more than calculate potential profitability; it helps identify campaigns that are generating sales.
To analyze the overall campaign performance, it is best to combine ROAS with CPL (cost per lead) or CPA (cost per acquisition) goals as these take into account traffic and lead quality.
For example, if you have a low CPL and a low ROAS, you know you aren’t generating quality leads. However, if you have a high CPL but a low ROAS, it denotes you aren’t wasting time with unqualified leads, and the CPL goal can be raised.
Bottom line: the higher the ROAS, the better.
How to improve return on ad spend
To improve the metric, dig deeper into your targeting, its accuracy, and ad costs.
Check ROAS accuracy
The first thing 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. Ensure you are using an attribution model that 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.
Lower ad costs
ROAS comprises two things–the cost of ads and the revenue they generate. So, by lowering ad costs, you can increase the metric.
- Review negative keywords: The average Google Ads account wastes up to 76% of its budget on the wrong keywords. Add the right negative keywords to only incur ad costs for the right audiences.
- Improve Quality Score: For Google Ads campaigns, a better Quality Score results in a higher ad ranking. This helps improve revenue and reduce wasted ad spend.
Improve ad revenue with relevant landing pages
In tandem with lowering ad costs, improving ad revenue should also be a priority. You can achieve this by connecting ads to relevant post-click experiences.
When intent and relevancy match audience expectations, you decrease cost-per-click and increase advertising conversions.
Create landing pages at scale for all your ads to give a personalized experience to visitors, increase conversions, and return on ad spend.
Maximize your ROAS with Postclick
Partnering with Postclick gives you access to an expert advertising conversion team leveraging proprietary Post-Click Automation technology to turn clicks into conversions:
The first step is offering you a complimentary analysis of your ad campaigns, including competitive insights against your top 5 competitors and the top sites in your industry. Our team will share insights on how we can increase your conversion rates, in addition to a comprehensive competitive analysis.
Plus, we will review your campaigns to analyze your post-click health, compare your site against industry and competitive benchmarks, and identify the most effective opportunities to increase your ROAS. Request your analysis here.