What is Return on Ad Spend (ROAS)

What is Return on Ad Spend (ROAS)

Return on Ad Spend or Return on Advertising Spend (ROAS) is a marketing metric, or key performance indicator (KPI), used in online marketing. Return on Ad Spend measures how profitable and effective an advertising or marketing campaign was for every rupee or dollar spent on it. 

You can use ROAS to determine the profit earned for your overall marketing strategy or at every individual campaign or ad level because the formula for ROAS remains the same. 

The formula to calculate the ROAS is: 

Return on Ad spend = Revenue earned by ads/ The total cost of ads x 100. 

Businesses use this formula to evaluate whether their ads are yielding beneficial results. They use it to gain insight from the data received and to chalk out the steps they can take to improve future advertising efforts.

What is ROAS? 

ROAS – return on advertising spend is a measuring metric that calculates the amount of revenue earned for every dollar you spend on advertising. Essentially, ROAS measures the effectiveness of an advertising campaign. 

For example – your firm spent $100 on the latest ad campaign, and you want to measure the value of this campaign in terms of money. Say, from this campaign, you have generated revenue of about $250 – meaning your ROAS is 2.5 – which is excellent! 

You do not have to stick to measuring ROAS for the entire campaign. You can also measure it at several levels – at the campaign level, each account level, specific ad level, and more. 

ROAS is used to precisely measure the ad campaign and not the total return on investment.

In addition to ROAS, it is good to measure the bounce rate, click-through rate, and ROI to get an overall picture of your results. 

Of course, every firm and every ad campaign needs some form of measurement and performance analysis. It is essential to track the performance – to understand and improve – and data is perhaps the only tool that can provide concrete, actionable insights into your marketing strategies. 

Check out the below video to know more about ROAS in detail

Importance of ROAS 

ROAS is an important metric that shows an ad campaign’s quantitative effectiveness and analyses how the campaign contributes to the business’ revenue.

  • The importance of ROAS lies in letting you know exactly which ad campaigns are bringing you revenue and which ones are not as successful. 
  • It will also help you determine whether you should continue your efforts or redefine the expenditure to cut costs. 
  • Besides, you can also use it to measure, analyze, evaluate and compare the value of ad campaigns across various channels. 
  • When combined with other metrics such as CPC, CPA, and CPL, it is possible to get a more holistic view of the marketing efforts. 

How to Calculate ROAS

Return on Ad Spend is equal to the revenue generated by the ads divided by the cost of ads. So, if you have exact data on how much you spent on your advertising campaigns and how much revenue the ad campaign generated, you have a fair chance of getting almost perfect figures. It is pretty straightforward to calculate for an eCommerce site since all the transactions and sales happen online. You can quickly identify which campaigns brought in the conversions and which ones did not work their magic.

Why ROAS is above CPA 

While both ROAS and CPA are used to measure an ad campaign’s success, they measure different parameters such as the amount spent, salaries, and commissions paid. ROAS is used to measure the profitability of your ad spend, while CPA is used to measure the amount paid to create a single conversion. 

Let us look at scenarios A and B, where the ad spend is $100, conversions are one each, and the cost per acquisition is $100. So, both the ad groups A and B spent $100 each, acquired one conversion, making the CPA $100 in both cases. However, in the case of ROAS, if campaign A generates $300 and B generates only $100, then an entirely different picture starts emerging.

The ROAS in A and B campaigns are 3.0 and 1.0, respectively – showing a starkly different return on investment against the invested amount. 

When you want to measure the profitability of your ad spend, ROAS is the right choice. And when you want to optimize your marketing efforts to drive a specific volume, go for CPA. The lower the CPA, the better it is for your business. On the other hand, the higher the ROAS, the better your ad campaign is working.

ROAS vs ROI

While Return on Ad spend calculates the revenue attributed from advertising, return on investment (ROI) calculates the net profit earned from a particular investment to boost business. 

The ROI formula is similar to the ROAS one: 

ROI = net profit/ net investment x 100. 

ROAS can be a part of ROI, but the opposite is not true. 

ROAS vs eCPA 

Effective Cost Per Action/Acquisition (eCPA) is another marketing metric that helps ascertain the efficacy of the CPA ad model. You can determine it by dividing the total profit or revenue earned from an ad campaign by the total number of actions taken on an ad. The eCPA model lets advertisers and marketers pay only for the results or organic clicks or views of an ad, thus eliminating any fake views. 

ROAS vs. CTR 

Click through rate (CTR) is the percentage at which your ad(s) during an ad campaign get clicked by users. It is a ratio arrived at by dividing the number of clicks your ad receives by the number of times your ad is shown online. The higher the CTR, the better your ad fares with users. 

What is a good ROAS? 

According to marketing experts, there is no magic ratio of ROAS as it depends on various factors like your industry, profits, the average cost per click, and so on. But a good Return on Advertising spend is a 4:1 ratio—at least, this is what most companies aim towards. 

What is a target ROAS? 

A target Return on Ad Spend is the revenue or profits you aim to earn for every dollar spent on ads. To set a target ROAS that works for you, you can use the Recommendations page in your Google Ads account and see the recommended target ROAS based on your historical performance or historical conversion value per cost data.

How to use conversion value to calculate ROAS 

To measure ROAS in Google Ads, you have to add conversion metrics to each conversion action. You can start by adding a standard flat value for each conversion action. Additionally, you can also assign a dynamic value to each unique transaction and start tracking the conversion. 

When calculating the ROAS, you should also take into consideration other post-conversion metrics. You need to factor in the amount spent by your sales team in transforming a lead into a customer and the value (in monetary terms) that the customer will bring to your business. 

Let us now look at an example,

You have undertaken a lead generation campaign and transformed about 10% of the leads into customers. If each of these leads brings $10,000 in value, the final output will be $1000 in value. So, $1000 CPA becomes 1.0 ROAS, a $500 CPA will lead to 2.0 ROAS, and so forth. 

When you assign a flat value to lead generation actions using a form fill, you can prompt Google Ads to generate ROAS for all your campaigns instead of working around your code. 

How to optimize Google Ads account for ROAS

Before optimizing the Google Ads account for ROAS, ensure you correctly set up the Google ads account. 

Select the particular ad campaign in your Google Ads account that you are optimizing with a Target ROAS strategy. Select the ‘All settings’ tab under the ‘Settings’ category. Press ‘Edit’ on the ‘Bid Strategy’ tab. In the ‘Change Bid Strategy’ tab, select the ‘Target ROAS’ tab. Here, you can enter the required ROAS bid in the form of a percentage and click on Save. 

Once the conversion values are allocated, you can start optimizing the Google ads account. Start your analysis by first having a significant amount of data. Then, begin dividing the data into separate groups or campaigns. 

For evaluation purposes, you would require at least 100 clicks per campaign. But, as always, the more extensive the dataset, the better the evaluation. 

For optimum evaluation, you should also separate the campaign based on offerings. Every campaign should ideally have services and products divided so that there is a balance in return and volume. 

Marketers should note,

  • Search terms that bring in conversions
  • Keywords that bring in no conversions but have high spend
  • Keywords or ad groups that do not lead to conversions but use up a lot of budgets.
  • Negative keywords which do not help your business

Higher conversion rate keywords such as those with a blatant sales intent ‘sale’ ‘buy’ ‘offer’ ‘shop’ often bring better results. Additionally, short keywords without the sales context could also get higher search volume. The moral – having a greater sales intent and context can be highly valuable. 

It is always better to split an extensive campaign into smaller groups that are specific and clear-to-the-point in terms of context instead of analyzing a high-spending generic campaign as a whole. Since the large campaigns have already been split into smaller versions that bring better returns, the idea would be to continue working on the high-spend campaigns that are less efficient.

Moreover, the goal should always be to focus on campaigns that are bringing in sales. It is recommended that you consistently evaluate the impressions shared on all your campaigns so that the successful campaigns are not bearing the brunt of higher spending on weak campaigns.

It would help if you strived to balance these two scenarios and devise strategies to enhance both campaigns.

Another point to note is to extend the optimization of your Google ads account. In addition to reviewing search queries and budgets, you should also evaluate your target audiences, their search history, purchase history, demographics, and more. What are their searching patterns? What is their buying pattern? Keep these in mind when optimizing Google Ads for ROAS. 

Things to consider while calculating ROAS 

Calculating ROAS is incredibly simple and hassle-free. It is estimated on the revenue generated by the ad campaign against the amount spent on the drive.

When calculating ROAS, consider, 

  • Salary Costs – the amount spent, salaries of advertising personnel (both in-house and contracted) who contributed to that particular ad campaign.
  • Vendor Costs – the amount spent on commissions and vendor fees involved in the ad.
  • Affiliate Commission – the amount paid to networks and affiliates.
  • Purchased impressions – the amount spent on paid impressions. 

You have to consider these crucial points when calculating the return on ad spend for your business. Without these inputs, you might not be able to reach the correct values. Further, these values help you re-strategize, re-align your resources and determine the success of each ad campaign based on various parameters. 

Wrapping Up

Tracking Return on Ad Spends and analyzing it can throw up many challenges and provide you with opportunities to tackle them. Each campaign has a specific goal, but the final desired outcome for any campaign is sales and business growth. 

Once you track ROAS, you can develop several strategies to enhance your sales, average order value, up-selling and cross-selling products. Reach out to Infidigit for absolute SEO mastery including ROAS strategies, PPC services, and more.

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What is Return on Ad Spend (ROAS)