When it comes to measuring the success of your marketing campaigns, there are a lot of metrics you can choose from. Should you drill down into improving your cost of acquisition? Or maybe lower your cost per lead? Customer lifetime value and return on investment are other good ones to also calculate, right?
While all these metrics (and even more) have their time and place to help your company determine how successful and profitable your marketing campaigns are, there is another one that has potential to provide the best value across all the board when seeking a black and white analysis. This would be your return on ad spend.
Your company’s return on ad spend, or ROAS, helps paint a clear picture of how all of your campaigns are performing and helps equalize them to compare different marketing channels and advertising efforts. Once you determine what your company’s healthy ROAS ratio is, it can easily illuminate what marketing campaigns are worth your time and money, and which ones aren’t.
What is ROAS?
As mentioned before, ROAS stands for return on ad spend, which shows a company how much revenue a campaign brings in from each dollar that is put into it. Digital marketing companies use ROAS to determine which campaigns are succeeding, which ones could benefit from optimization, and which ones should be taken down.
ROAS can also help companies determine future advertising methods and strategies. If a specific Google Ads campaign you’re running has a high ROAS, emulating that for another campaign has a higher chance of producing successful results than choosing a more lack-luster campaign to copy, or choosing to start from scratch.
ROAS vs. ROI – What’s the difference?
Both ROAS and ROI, or return on investment, deal with how much money you’re getting back from your marketing efforts. The difference lies in measuring a single campaign versus all of your marketing channels. ROAS calculates only the return in regard to a specific campaign, like a landing page or a Google Ad group. ROI, on the other hand, measures the overall return on an investment, like your entire marketing strategy.
A good way to visualize the difference between these two metrics is that ROI is used for the big picture of marketing, while ROAS focuses on the smaller, individual campaigns. You can use ROAS for comparing campaigns, while ROI is used for how that campaign will affect overall profits.
So if you want to see how your business is doing, you will want to find your ROI instead of the ROAS for a campaign, but if you’re evaluating a specific campaign, you’ll want to use ROAS.
How to Calculate ROAS
Calculating the ROAS of one of your campaigns is luckily a simple formula. To find your ROAS, you’ll divide the amount of revenue by the cost of the ads:
gross revenue from ad campaign / ad spend = ROAS
For example, if a specific campaign brought in $10,000 of revenue and you spent $5,000 on it, you would take that 10,000 and divide it by 5,000. $10,000 / $5,000 = $2, giving you a ratio of 2:1. This means that for every dollar spent on the campaign, you get $2 worth of revenue.
There are some programs out there, like Facebook or Google, that can automatically figure out your ROAS for a campaign, but it’s better to know how to do it manually so you can calculate it for your other marketing channels. This will also help your company compute and understand the correct benchmark for your business.
Why ROAS is Important for Your Business
By calculating your return on ad spend for specific ad campaigns, you are able to determine how well an ad is performing and how it adds to your overall business. ROAS also gives you the ability to compare ad campaigns against each other with just a simple calculation.
Even if you are comparing ads across different channels with different budgets or audiences, ROAS gives the ability to evaluate them even with all their variables by boiling it down to revenue brought in divided by what was spent.
For example, you might be running two different campaigns that look like there’s a strong winner. Campaign 1 costs $30 per conversion, has brought in 100 conversions with a total campaign spend of $3,000 and revenue of $6,000. Campaign 2 costs $60 per conversion, has brought in 55 conversions with a total total campaign spend of $3,000 and revenue of $9,000.
Campaign 1 brought in almost double the conversions for half the price per conversion, so that’s our winner… right? ROAS would tell us a different story. Campaign 1 has a ROAS of 2:1 whereas the campaign 2 has a ROAS of 3:1. This example illustrates how calculating ROAS can compare different campaigns and truly show you how much you’re getting out of your marketing initiatives.
What is a Good ROAS Number?
Although there is no magic ROAS number all companies should aim for, most experts agree that the higher the ROAS ratio, the better off the campaign. This inherently makes sense when you boil it down – it means that your specific campaign is bringing in more money for every dollar spent. If you are looking for a hard ratio, the most common one is 4:1, where for every dollar you spend, you receive $4 of revenue.
Many factors influence ROAS including profits margins, health of the business, and operating expenses. A start-up should aim for higher margins, while a store that has been in business for fifty years and is continuing to do well can look at lower margins. The key is figuring out what a good ROAS is for your company. Some businesses need a high ROAS of 9:1 to be profitable, whereas others can healthily grow at a ROAS of 3:1.
When starting a small business online, lower ROAS ratios tend to be normal as it takes time to figure out who your audience is, what they like, and what they respond to. Small practice campaigns are recommended when starting out in order to gain this knowledge of what generates the best revenue.
With small campaigns, you can analyze the ROAS between them and eliminate the ones that do not work, while increasing your budget on the ones that do. Overtime, you will be able to determine what is the correct ROAS ratio for your business and use that as your benchmark.
How to Track ROAS for Your Marketing Campaigns
While the formula for finding ROAS is simple, you will need to gather some data in order to correctly calculate it, which can often be challenging. You’ll want to include everything that goes into the cost of the ad including:
Network Transactions Fees
Vendor or Partner Costs – including salary and other personal expenses that contribute to making the campaign
On top of that, finding the revenue generated by one ad campaign can be tricky; it may not just be based on sales numbers, but data from clicks and views. For example, someone may click on your link to download a free brochure, which should be counted towards your ROAS, but they haven’t spent any money.
There are several programs out there that can help collect data from clicks and impressions, depending on what platform you are running your ad on. HubSpot and Facebook Ads are two channels that offer CRM software to track revenue from leads.
How to Improve Your ROAS Ratio
Increasing your ROAS number can be tricky, even for established businesses, but there are some tactics and goals to help get you there. You will want to start with the following goals:
Lower the costs of the ads while maintaining the same amount of revenue
Increase the revenue while lowering the cost
Increase the revenue while keeping the cost stable
These improvements, of course, are easier said than done, especially if you are working on a tight budget for a campaign and can’t lower the cost without compromising the ad. However, if you are able to rework parts of the campaign or improve aspects of your business, you can help generate more revenue.
Refine Keyword Targeting – Optimize product pages, landing pages, and ads with targeted keywords to help increase high-quality traffic that is more likely to convert to clicks or purchases. Make sure to conduct keyword research before beginning a campaign in order to save time and money in the long run.
Use CRO Strategies – CRO, or conversion rate optimization, is key in increasing your revenue. For example, there is a high rate of cart abandonment for ecommerce websites which leads to lost money. Instead, try to optimize your website to reduce cart abandonment rate through cart pop-up reminders or other efforts.
Optimize Your Landing Pages (and ads!) – When creating a business, user experience is highly important to making sales, regardless of what type of business you are running. If you are running a marketing campaign that directs users to landing pages, make sure to cater each landing page’s messaging to its associated ad and campaign.
A Good ROAS Varies from Company to Company
ROAS is an important number to calculate when you are looking at individual marketing ad campaigns. It allows you to find out if your campaign is successful based on how much revenue it is bringing in compared to how much you have spent. If your ROAS ratio is low, it may be time to pull that ad and reallocate the budget to a higher ROAS ad.
There is no specific “good” ROAS ratio. Each business is different depending on profit margins, budgets, and more. ROAS allows you to play around with ads, testing them with different markets to find the right way to reach your target audiences.
If you do find yourself with lower ROAS ratios, it may be time to rethink your strategy for your campaigns and cut costs where you can in order to find the most successful ad. You can also look into hiring outside sources to help you find opportunities to increase your ROAS ratio. Jack & Bean specializes in various marketing strategies to help grow your business.
Whether you know exactly which services your business needs, or you’re so frustrated with your marketing that you don’t know which way is up, make time to chat with us and learn how we can help you succeed.