ROAS (Return on Ad Spend): Everything You Need to Know!
8 min read
Return on advertising spend or ROAS is a metric used to assess the success of your advertising campaigns. Let's take a look at how to calculate ROAS why it's important and what it can tell you about your business.
The ROAS formula is fairly straightforward. You simply divide your company's revenue by the amount you spent on advertising during a specific period of time.
ROAS = Total revenue / Total ad spend
For example if your total sales are worth $1000 and you spent $200 on advertising your ROAS would be 5. 1000 / 200 = 5. So for every dollar you spent on advertising you earned $5 back.
Your ROAS calculation may be broad or specific depending on the data that's available to you. You can figure out your brand's overall ROAS comparing your total revenue with your total ad spend across all channels and campaigns.
Alternatively you can do a ROAS calculation to assess the effectiveness of a specific campaign. For instance you could compare the revenue of a particular product with the money you spent advertising it. This is something to keep in mind for new launches.
If you use trackable digital ads you can also compare the revenue generated from each campaign with the cost of running them. For example companies using Google Ads should be able to see how much their spending and earning across their account. So they can easily calculate the ROAS of each campaign or ad group. This makes it easy to cut ineffective ads and replicate compelling ones.
However it isn't always easy to calculate the ROAS of a single medium. It is difficult to determine exactly how much revenue the likes of billboards magazine ads or television campaigns generate. For this reason it makes sense to calculate the overall ROAS of your brand before looking at individual digital channels.
It is also a good idea to calculate the ROAS of an advertising campaign several times during its runtime at the start midpoint and end. As a reference point you can compare the results with other campaigns run on the same channels.
The importance of ROAS
Although the ROAS formula is fairly simple to use it is one of the most important eCommerce KPIs to keep track of. Here's why:
1. It safeguards against major losses
Advertising is an essential part of eCommerce marketing but it is often the most expensive part too.
If a particular advertising campaign isn't working marketing executives need to know as soon as possible. This way they can tweak the messaging reduce the budget or cancel it altogether. Otherwise a weak campaign may run up hefty losses and hurt your brand's bottom line.
2. It helps brands get better
By knowing the ROAS of a campaign marketers can better understand their customers what drives them to convert and the channels that engage them the most.
They can then scale these campaigns to improve sales. But they can also cut the campaigns that don't work driving up ROAS and reducing cost per acquisition at the same time. Brands that carefully track ROAS are more likely to make better business decisions when it comes to future budgets and marketing strategies too.
3. It can impress decision makers
While metrics like traffic followers and conversions are all pretty useful. Return on ad spend allows you to demonstrate exactly how much revenue your advertising campaigns generate.
This is a solid indicator of the scalability of a brand and its products. So a healthy ROAS is great for marketers who want to secure bigger budgets as well as businesses that need to woo investors.
The limitations of the ROAS formula
Return on ad spend is important. But if it is the only metric you rely on it can be misleading. That's why you need to track it alongside other key eCommerce KPIs.
The value you place on the ROAS measurement will depend on your brand's advertising goals. For example if you want to build brand recognition awareness and visibility a low ROAS isn't necessarily bad news. But if you're focused on generating sales it's essential.
It's also worth noting that you can have a healthy ROAS and still lose money! The ROAS calculation only accounts for advertising costs. In reality there are many other overheads that need to be paid for think shipping storage and production. ROAS simply indicates whether or not your advertising is effective. But you need to optimise all areas of your business to make a profit.
How to optimize your campaigns for ROAS
Firstly to be able to optimize your ROAS you need to be sure that you're tracking spend and return as accurately as possible.
If you're advertising on Google and you have your conversions set up properly you should be able to get an accurate figure on this channel. But your paid social campaigns are much harder to accurately measure.
Unless you're using advanced shoppable media software you're likely only able to send traffic through to your product pages and even then you might not be able to trace these campaigns accurately back to spend.
Secondly to gain valuable insights into your campaigns you should analyse a sufficient volume of data before deciding how to split out ad spending campaigns and/or ad groups.
Your campaigns with the highest spending don't always have the highest volume of conversions. This can be a cause of numerous factors such as your targeted keywords ad copy or target audience. You should be diving into each campaign and identifying what is working and what is failing. In your account continue to review your impression share to ensure that these new more efficient campaigns aren't missing out on clicks due to the inflated budgets of less efficient campaigns.
It's hard to pinpoint what is exactly the shortfall of your campaign when it has a low ROAS but the areas you should look into are:
The most common pitfall of a campaign can be irrelevant keywords causing a high spend and no conversions. When launching a PPC campaign one of the first things you do is target specific keywords. Be careful which keywords you pick as rather than aiming for short one-word keywords try to prioritize long-tail keywords which are several words long. By targeting long-tail keywords you'll have more luck reaching qualified leads in your audience and driving them to your website.
Furthermore the use of negative keywords can have a profound effect on the quality of your leads. Negative keywords are terms you don't want your ads to appear for in search results. This can nullify the impact of irrelevant searches falling into your campaign.
2. Ad Copy
Another key element of your content strategy is your landing pages and ad copy. Each of your PPC ads should lead users to a specific landing page which a specific call to action. To optimize your content successfully the best thing you can do is to align it with ad copy. A poorly optimized landing page will decide whether or not the user will continue on their consumer journey or leave the brand page.
Make sure the two are in sync with one another. If they aren't in sync people will quickly notice it and click away rendering your ads completely ineffective. To avoid this you need to create a unique landing page for each ad you run and have a streamlined path to purchase.
3. Target Audience
When it comes to PPC reaching the right target audience is essential. That's why you target specific keywords and if you advertise to the wrong people you won't drive your desired results. Fortunately keywords aren't the only targeting option you have.
You can also target your ads to reach specific groups by using custom audiences. This way allows you to list particular demographics that you want to target whether that be Age Gender Job Location and many more.
By selecting the features that best match your target audience you can ensure that your ads are shown to the exact people you're trying to reach. That sort of audience honing is an excellent way to optimize your campaigns.
What is a good ROAS benchmark?
It is difficult to define what a good ROAS is. It varies between advertising channels and industry verticals. The likes of product pricing profit margins and business maturity influence it too.
Any clear-cut figures set out are also liable to change as advertising costs increase. According to eMarketer digital ad spending is continuously rising and is set to grow by 50% in the next 4 years. So if your ROAS calculation is diminishing this could be a contributing factor.
A commonly used ROAS benchmark is 4. In other words $4 in revenue is generated for every $1 that is spent on advertising. In fact back in 2016 research by Nielsen found that 4:1 was the average ROAS ratio for CPG brands in the eCommerce sector.
However startups are likely to need a higher ROAS to cover costs and finance growth while established businesses can often survive with a lower one.
If you'd like to compare yourself against other brands within your industry advertising tool Sidecar recently released a benchmark report. It outlines the average ROAS across Google Facebook Instagram and Amazon all of which increased over the past year.
According to its research these are the average retail ROAS metrics for each one:
Google paid search: 13.76
Facebook advertising: 10.68
Instagram Advertising: 8.83
Amazon advertising: 7.95
It also provided average ROAS figures for certain industry verticals. Here are some of the standout ones:
Google paid searchFacebookInstagramApparel & accessories24.7315.3410.53Automotive parts & accessories20.5217.9815.03House & home13.1114.3317.42Toys & hobbies23.295.715.47Health & beauty7.19
Once you start tracking your return on ad spend there are lots of strategies you can use to improve it.
Pushing up your average order value should increase it. So look at marketing tactics like upselling cross-selling shipping thresholds and product bundles. Exploring cooperative advertising opportunities is a great way to cut advertising costs and drive up your ROAS metrics too.
Of course once you start tracking your ROAS you'll be able to identify other optimization opportunities too. Just make sure you take time to consider how you can get the best return for your investment.
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