With how competitive the digital landscape has become, there are multiple components that determine how successful an ad campaign is. This is where return on ad spend (ROAS) comes into play.
This marketing metric sheds light on how profitable advertising efforts are. This article will take a deep dive into the inner workings of ROAS, how to calculate it, what makes it different from ROI and why this metric is so beneficial
What Is ROAS and How Does It Work?
Return on ad spend is a metric that measures how much revenue is generated from online advertising in correlation to the capital used to run the campaign. In other words, marketers use ROAS as a way to determine campaign success.
The way ROAS works is that it looks at how much revenue is generated from every dollar spent on online advertising.
How Do You Calculate ROAS?
While ROAS is an essential marketing metric, the way to calculate it is rather simplistic. All you need is the total ad revenue value divided by the total ad spend. Using this method of calculation will give you your ROAS in a ratio format e.g. 5:1 or 3:1.
For example, a company runs an ad campaign that costs $1600 which resulted in them earning $8000 in revenue. To calculate ROAS for this particular instance, the total revenue would be divided by the overall cost of the campaign. In this case, their ROAS would be 5:1.
ROAS = Total revenue / Total ad spend
ROAS = $8000 / $1600
ROAS = 5:1
What this ratio means is that for every dollar spent on the marketing campaign, they will get 5 dollars as revenue in return. Overall, this is a good ROAS but for every company it is different. The reason for this is that it can depend on the type of ad campaign and what the needs of the organisation are as well as the industry in which the company operates.
For instance, if the advertising campaign goal is to increase brand awareness, the ROAS will typically be lower. This is due to the fact that increased brand awareness does not directly correlate to more conversions. Thus, it is crucial to determine what a good ROAS is for your company before your ad campaign launch.
You can also calculate ROAS as a percentage. All you need to do is multiply the value by 100.
ROAS = {Total revenue / Total ad spend} *100
It is worth mentioning if your return on ad spend is 50% it does not mean your ad campaign generated 50% more in revenue. In this case, it shows that you only got back 50% of your initial investment. In other words, the 50% does not indicate a positive return on your advertising efforts. ROAS needs to be over 100% for your campaign to make a profit.
Why Is ROAS Calculation Important?
ROAS calculation and tracking are essential because it allows marketers to see what is not working and enables them to adjust their marketing strategy accordingly. Without calculating ROAS, companies are essentially operating blindly when it comes to evaluating the worth of advertising initiatives.
For example, a campaign might appear successful if it significantly increases app users and generates substantial revenue. However, once the company calculates ROAS, they might find that the cost to acquire these users was higher than the revenue generated. In this case, the ad campaign wasn’t truly successful.
That is why ROAS is so important. It helps them determine whether the revenue generated from an advertising campaign justifies the costs of running it. In other words, a positive ROAS will show that the ad campaign is profitable while a low ROAS could indicate that further changes are required.
This allows the company to focus on what is working and cut the ad campaigns that are not. Thus, improving their overall advertising efforts. Return on ad spent also helps with budget allocation. With companies having a clear understanding of what ad platform and advertising campaigns result in the highest ROAS, they can make more calculated decisions on where they should allocate their budget.
How Does ROAS Differ From ROI
While ROAS and return on investment (ROI) might seem very similar to one another, they are quite different. Both metrics are used to measure the effectiveness of advertising initiatives, but they focus on different aspects of performance.
ROAS measures whether a marketing campaign is profitable. It takes into account the revenue generated for every dollar spent on advertising. ROAS solely focuses on the performance of ad campaigns.
Whereas ROI is more of a broader metric and looks at the total investment. It not only takes into account advertising costs but all the associated costs that went into the campaign such as the labour involved, the design and distribution.
In other words, it assesses the overall profitability of the campaign factoring in all associated costs that went into it and not only the amount that was spent on the ad itself. Thus, ROI is used across various business operations whereas ROAS is primarily used to determine campaign success.
How To Improve Your ROAS In Ad Campaigns
There are several focus points that companies can prioritise to improve their return on ad spend. Here are a few key ones to look at:
1. Optimise Your Audience Targeting
Firstly, you want to make sure that you are showing your ad campaign to the right people. You will need to have a solid understanding of what your target customer looks like, where they spend their time and what they are interested in.
Doing so will allow you to tailor a specific message that resonates with your audience and ultimately increase your overall conversions. In addition, it will also ensure that you focus your advertising efforts on the correct marketing channels that will yield the best results.
2. Improve Your Landing Page Experience
Often companies have a high click-through rate (CTR) but still don’t see much progress with their conversions. This can be a clear sign that your landing page is in dire need of an upgrade.
You want to ensure that your page loads quickly, is well-optimised, has strong call-to-actions (CTAs) and that your sales copy is engaging. All of this will ensure that when your target audience lands on your page, there are no minor inconveniences that stand in their way of converting.
3. Test and Improve
To achieve a high ROAS, you will need to know what works and what does not. The best way to do this is to test different ad platforms, campaigns and creatives to see what makes an impact on your audience. This is where A/B testing can prove extremely useful.
4. Adjust Your Bidding Strategies
Another good way to increase your return on ad spend is to experiment with different bidding strategies. Again, this comes down to seeing what works best. When you experiment with different bidding options, you might discover that using a specific bidding type saves you money. Thus, allowing you to improve your overall ROAS.
5. Utilise Analytics to Drive Your Decisions
To help you get a good ROAS, you should continuously monitor your data and look for areas that you can improve. Predictive analytics can help you identify early signs or patterns that could potentially indicate whether a campaign will be a success or failure.
These indications can help you make better decisions and allow you to manage your ad spend more effectively.
Common Mistakes to Avoid With Return on ad Spend
When it comes to ROAS analysis, there are a few common pitfalls that you want to avoid. The first one is to not overly rely on ROAS and neglect other essential marketing metrics.
While return on ad spend is an important factor, you should also look at other metrics to help you build a clearer picture of how you can improve your future campaigns.
In addition, many marketers/companies make the mistake of setting too high and unrealistic returns on ad spend goals. It is essential that companies carefully base their ROAS goals on what is possible for their company. Thus, it is important to first establish a baseline of what a good ROAS goal will be before you start the campaign.
Remember to factor things in like the marketing channel you will use, the objective of the campaign and the type of industry in which you operate. The last pitfall you should try to avoid is not having your conversion tracking set up properly.
This will directly affect your ROAS ratio. You want to ensure that you utilise solutions that effectively track the conversions on your website. If a customer decides to make a purchase a week later after seeing your ad, you want to ensure that is factored in.
Optimising Your ROAS For Greater Ad Campaign Success
In today’s technology-infused world, the online landscape is extremely competitive. Thus, it is crucial you understand and effectively manage your ROAS to help you reach greater ad campaign success.
By realigning your audience targeting strategy, optimising your landing page and consistently focusing on improving what’s working, you can drastically improve your ROAS and have more profitable marketing campaigns.
If you are looking to take your marketing efforts to the next level and get more out of your ad spend, our experts are here to help. Snowball Creations is a marketing agency that specialises in paid advertising. Fill in the contact form below to find out how we can boost your ROAS and drive measurable results for your business.