The key to running a successful ad campaign is to always make improvements. That said, you need to have the right information to help you make the appropriate adjustments.
That’s where metrics like ROAS come into play.
Simply put, ROAS is the ROI equivalent of paid ads. It tells you how big your ad campaign revenue is with respect to cost.
In this article, we’ll discuss what ROAS is, why it’s important, and how to compute it. After reading, you should have a better idea of how to get more out of your ad campaigns.
What is ROAS?
ROAS stands for return on ad spend. It measures how much money you make for every dollar you spend on advertising. In this regard, ROAS is very similar to ROI or return on investment.
It’s important to note that while they do share some similarities, they don’t mean the exact same thing. In fact, the two marketing terms have key differences, especially in the way you compute them.
We’ll dive more into it later, but in the meantime, let’s go back to what ROAS is.
To understand this marketing metric better, we should backtrack a little bit and talk about paid ads:
- Your advertising strategies should be designed to help your business make more money.
- The more effective your efforts are, the higher your ad revenue is.
On the flip side, if your ad campaign is not working, it won’t be able to increase your conversions or your profits.
Either way, you need to know how your campaign is performing so you know what to do moving forward. ROAS can help you do that.
Another interesting thing about ROAS is that you can measure it at many different levels.
Consider a company that spends money on multiple platforms like Google Ads, Facebook, and Amazon. They could get their ROAS on Google Ads or Facebook Ads alone, depending on their needs.
It’s also possible to measure their ROAS within a specific platform at the account level, ad level, campaign level, and even keyword. All they would need is a tool that would generate a report within minutes.
Why understanding ROAS is important
Both ROI and ROAS are important metrics every marketer should know by heart.
- You could use either one to evaluate how your ad campaign is doing
- You could use this information to recommend timely business decisions.
However, ROI pays more attention to the overall result of your online marketing efforts. In the context of paid ads, it measures the profit you get from ads in relation to the amount of money you spend on them.
In comparison, ROAS can be much more focused. For example, you could apply it to entire campaigns or specific keywords.
Of the two, ROAS is more helpful when it comes to understanding how paid campaigns are performing. It allows you to determine which strategies are working and which ones are not.
You can fully appreciate the power of ROAS if you run multiple campaigns at the same time. So let’s revisit the above examples where you use Google Ads, Facebook Ads, and Amazon Advertising.
Say your company is ready to spend more on paid ads, but you don’t have enough to boost your efforts on all platforms. What’s more, you are looking to get the most out of every marketing dollar that you add to your budget.
How do you know which one to prioritise?
In this situation, knowing the ROAS for each platform can help you make the right decision. All you have to do is compare the platforms to one another using this metric and see which are the best-performing ads. Once you see this comparison, you will know better what to do.
Another way it can help you is by allowing you to reallocate your resources as you see fit. For instance, if you measure the ROAS for all marketing platforms and find that one of them is not performing as expected, you can realign a part of your budget there and use it on more productive channels.
Also, note that you can do all of these things not only for ad campaigns but even for keywords:
- You can measure the ROAS for all the keywords you are targeting and see which are performing well.
- From there, you can decide better where to spend more on paid ads.
How to calculate ROAS
Now that you know how vital ROAS is, the next step is to learn how to compute it.
Given all the details we have discussed so far (and all the fuss we have made about this metric), it’s natural for you to think that the ROAS calculation formula is convoluted. Fortunately, unlike other marketing calculations, ROAS is fairly easy to calculate.
To get the ROAS, all you have to do is divide the total campaign revenue by the ad campaign cost.
However, before you get to this step, you must first identify which specific component of your paid ads you want to evaluate. After doing this, you can go on and get the total revenue that this component generated and divide it by the total cost for that component.
To illustrate, consider a product that costs $500 each. If you spent $10 in paid ads to sell this unit, your ROAS would be $50. It means you made $50 for every marketing dollar you invested.
Now, how do you determine the revenue that your campaign generated or find out quickly how much you spent on ads?
Again, the answer to this question is much simpler than you might think. You don’t need to use a spreadsheet and manually keep track of everything, either.
Advertising platforms like Google Ads and Facebook Ads have built-in features that help you monitor all your ad sales and conversions with just a few clicks.
There are also third-party solutions that can help you generate Facebook Ads reports, Amazon Ads reports, or any type of custom report.
Once you learn how to use these tools, you will be able to get the information you need to get the ROAS anytime you want to, which means you get a bird's eye view of your ad campaigns at all times.
ROAS vs. ROI - What’s the difference?
At this point, you have a better idea of what ROAS is and how to calculate it. Now, it’s time to dive deeper into what makes it different from ROI.
The term ROI applies to all the resources you invest in improving your company’s performance, both in terms of time and money.
To get your ROI, compute your net profit and then divide it by the total cost of your investment. Of course, the higher your ROI is, the better.
Understandably, it’s much easier to quantify items with an attached monetary value. You include here expenses like software, design, salaries, and whatnot.
Nevertheless, it’s possible to calculate ROI using time as a cost component. One simple scenario is where you have a product that earns you $200, but it takes you ten hours to make it. So your ROI here would be $20 per hour.
By looking at things this way, you can better visualize if that product is worth making. You can then decide whether it’s profitable to scale up your operations or if it’s wise to take things down a notch.
ROAS is more or less the same, but it applies specifically to paid ads. It focuses more on revenue instead of profit.
Whereas ROI is more concerned with the overall success of your ad campaigns, ROAS pays attention to the finer details of paid ads. That’s why it’s more useful to digital marketers than ROI.
As you may have noticed, ROAS and ROI have overlapping definitions and applications, which is why some people use the two terms interchangeably.
However, it’s a mistake you should avoid because these metrics have key differences.
Is ROAS the same as profit?
As mentioned above, ROAS is based on revenue – the income your ad campaign generates. So in simple terms, ROAS is not the same as profit. That’s because profit takes into account the revenue minus all the expenses involved, whether direct or indirect.
To give you a better idea, consider this scenario:
- You made $100,000 after selling all of the products in your inventory.
- You only spent $25,000 on paid ads to promote your brand and get people to buy your goods.
You spent a combined $80,000 on manpower, production, utilities, and other related costs.
If you were to compute your ROI, you would have to subtract the $80,000 overhead cost and $25,000 marketing cost from your $100,000-dollar income before dividing the difference by $105,000, which is your total spending. This will give you an ROI of -4.76%, which tells you that your venture is not profitable overall.
However, if you were to calculate the ROAS, you would simply divide your revenue of $100,000 by your total ad spend of $25,000. This will give you a ROAS of 400%, which is an indication that your marketing campaign was a success.
Now, given two conflicting sets of data, how would you proceed? The answer is to use both but in different ways.
Your ROI tells you that you need to change something to become more profitable. It could mean you should improve your production process, tweak your manpower, or look for a more cost-effective software solution.
However, you should not make any drastic changes to your marketing strategies because your ROAS is telling you that your current strategy works.
What is a good ROAS?
So now that you know how to calculate your ROAS, how can you use that data? What is a good ROAS, and at what point should you make changes to your ad campaigns?
Before we answer this question, we must lay out a few ground rules:
- First, a ROAS of 100% means that you broke even. This is because you made the same amount of money as you spent on paid ads.
- Anything lower than 100% means your ad spending exceeded your earnings.
So if your ROAS is only in the double digits, you are wasting your budget. You must stop what you are doing right away and reevaluate your options.
Things get a bit tricky when your ROAS is over 100%. That’s because there is really no hard rule on what a good number is.
In some cases, you can have a ROAS of 100% and still be profitable since this metric is linked to revenue, not profit. On the other hand, it’s also possible to run a good ad campaign and still lose money, as we outlined in the hypothetical scenario in the previous section.
Having said that, it’s obvious that the higher your ROAS is, the better. In addition, there are a few references we can use to help you evaluate how your ad campaign is doing.
For instance, if you use Facebook Ads, a good ROAS would fall in the range of 333% to 400%. A ROAS of 400% is also a good benchmark to use for most other marketing platforms.
Other industry experts are a bit more discriminating, saying that a ROAS of 800% can be considered good.
Another thing you need to consider is the business you are in and the product you are selling. However, a 400% return on ad spend is something that you could aim for, at least for starters. From there, you can implement slight changes and make gains incrementally.
How to improve your ROAS
If you are not happy with your return on ad spend, don’t worry. There are many things you can do to right the ship and improve your numbers.
That’s the whole point of monitoring your ROAS anyway — to determine if you’re on the right track or if you need to make a few changes. So here are a few suggestions.
1. Optimise campaigns and websites for mobile devices
Six out of every ten people all over the world use their mobile devices to go online and search for answers to their questions. That‘s five billion potential customers, clients, or buyers using their smartphones to look up products or brands to connect with.
So if your ads are not optimised for these devices, you are missing out. You won’t be able to reach as many of your target audience as you would like, which means fewer opportunities to convert on your part.
2. Optimise the customer journey
The purchasing journey of a potential customer is seldom a straight line. It rarely happens that someone who sees one of your ads drops everything they are doing to buy your products right away.
In most cases, they would try to find out as much as they can about your product, brand, and even industry. This would involve multiple visits to your website or even calls to your customer support team.
Maximise your chances of gaining a loyal customer by improving every touchpoint of your customer journey. Your website must be user-friendly, your support team responsive, your checkout process seamless, your calls to action compelling, and your offers enticing.
3. Target the right people
One thing you need to ask yourself is if you are connecting with the right kind of audience. These are people who are inherently interested in your type of products and are, therefore, easier to convert.
If you are targeting the wrong age group, gender, income bracket, or any other demographic, it’s like your ads are just falling on deaf ears and having no effect at all. You won’t be generating quality leads, even if you ramp up your spending. If this is the case, you are just wasting your marketing budget.
4. Test and optimise ad creatives
Even if you have been running an ad for some time, it might be a good idea to run A/B tests on it and find out if you could make improvements. That’s because some people experience ad fatigue, especially when it comes to single headline ads.
5. Examine competitor campaigns
It’s essential to keep tabs on what your competition is doing. It will give you valuable insights into what to do and what not to do.
This practice is more common than you might think. In fact, marketing platforms like Facebook have built-in features that can help you find out exactly what ads your competition is using.
Advertising has been around for as long as people first learned to buy things. While the basic premise behind promoting products or services remains the same, the complexity behind it just keeps on growing.
Now, there are many things that you need to keep track of, like ROAS and ROI. These terms seem intimidating at first glance, but once you understand them, you’ll find that they are both necessary and helpful.
Reporting Ninja provides built-in and third-party tools to help you get the most out of every marketing dollar by utilising these metrics to the fullest.
Sign up for free and see how easy it can be to run a successful ad campaign today!
