Return of Ad Spend is known as ROAS which is a popular financial metric used in the industry of digital marketing. Similar to ROI (return on investment), ROAS is a useful measure for all e-commerce businesses across the globe. This is the easiest way to evaluate how effectively a marketing campaign worked.
However, it should be kept in mind that a high return on ad spend does not mean profits for the company. Since there are other expenses that a company must bear to generate revenues. Although this metric can be quite useful for creating a correlation between revenue generation and advertising efforts.
ROAS can also be used for comparing the effectiveness of one advertising campaign against another. The comparison can be made against sales generation and the cost of advertising. Advertising campaigns often boost the total number of sales without any improvements in profitability. This happens because of the sale of products or services at a higher profit margin.
The formula for calculating the ROAS is by dividing the revenue generated from a campaign by the amount spent in advertising. It looks like this:
Return on Ad Spend is directly related to the profits margins of a business. Moreover, operating expenses and overall revenues of the business are influential in determining a good ROAS. There is no “right” answer to a good average ROAS, however, a ratio of 4:1 is set as the industry benchmark.
4:1 ratio means $4 revenue generated from every $1 spent on digital ads. Businesses that have just entered the market may consider higher margins. On the other hand, online stores aiming for growth can consider setting higher advertising costs. This also makes sense when online sales are already above average.
Keeping this in mind it is safe to say that a good ROAS ratio is directly proportional to set profit margins, and the defined budgets. Some businesses need a ROAS of 10:1 so they can generate profits while others can grow at a stable rate in just 3:1. It is easier to gauge a business’s ROAS depending on the goals of the business.
The industry average ratio of a good ROAS is 2.87:1, which means that a company makes $2.87 for every $1 spent on advertising. This study conducted by Nielsen also revealed that a good ROAS depends on the health of the business.
Furthermore, the stage at which a business is like if a business is just starting, budgets will be tight. On the other hand, if a business has grown, it can spend more on advertising. The trick to having an effective ROAS is utilizing the ad cost wisely and on the right things.
This research established three main factors to determine a good ROAS. One, the business stage (age) two, objectives, and three the business budgets.
There are a few things to consider for businesses to generate a good ROAS. Three main factors can help in measuring good expectations. They are as follows:
Since the concept of brand and category maturation are similar, they can be grouped. However, these work one after another playing as factors to impact ROAS. To get started, it is important to consider if the product or service already is known in the market.
Consider the example of eyesight glasses, contact lenses, or laser eye surgery. People already know about it. However, if a business is launching a new vitamin that helps to restore nutrition initially lost due to smoking is something new. Smokers already know about gum, cigarette patches, and other ways to quit. However, an introduction of a vitamin that helps in quitting in addition to restoring vital nutrients will grab much attention.
Such situations require special consideration since an additional layer of educating the audience will be needed. So new product categories and start-ups lie in a different pool of strategy where the ROAS will be measured differently.
Brand awareness is another factor to take into consideration. Take the example of a business that has a retail store and a strong customer base. If they start selling online, it would not take much time before the business can start generating sales. Using the leverage of brand awareness is a quick way to start generating a new stream of sales.
On the other hand, a brand new company first needs to spend money and time on brand awareness. It will take time before such a business can start generating a high-converting digital marketing program. Additionally, a business first needs to work on building trust in the market and create credibility.
As explained above, the more mature a brand is, the quicker it becomes for a business to accomplish the initial stages of a steady ROAS. Relatedly, start-ups will have to consider other expenses for establishing the brand name and image. Things like visual brand identity, strategy, and brand tone will take up most of the marketing and advertising budget.
Other costs include building an effective website, setting up an office including property and furniture. Moreover, other aspects of digital marketing strategy will require attention and expenses. In such scenarios, it is not easy to directly measure ROIs on these investment fronts. No matter what it costs, it is essential for positioning the brand properly and maximizing conversions. That being said, let us talk about the second factor.
A strong brand with an innovative product and an impressive website all directly lead to conversion. These three things can be grouped to generate potential leads or even better sales! But the question remains: is your brand interesting enough? Have you created an engaging website that keeps your visitors hooked till the end?
This simply means that an unimpressive website can result in all marketing efforts to go to waste. Even the best advertising campaigns that are accurately targeted can lead to losing potential customers. The reason being a clunky website. Having a good, clean website creates trust in the customer.
User experience is essential for visitors coming to your website for the first time. Things like a complex navigation structure can frustrate customers. Moreover, confusing language and payment systems can lead to lower conversion rates. The inquiry system also plays an important role in the user experience. Similarly, having attractive images or motion graphics that does not clutter the website can significantly reduce bounce rates.
This is the most important factor that determines a good ROAS. The average purchase price and product lifecycle, which is the rate at which each purchase is repeated. Take the example of a fitness brand selling nutrition bars priced at $5.50. This business would require frequent purchases and calculate the ROAS on bulk sales.
However, an eyeglasses business with each piece priced at $150 can achieve a good ROAS much quickly. Although the sales of an eyeglasses business would not be so frequent, it would still be enough to calculate a good ROAS. The lifecycle of the business would be different and ROAS will be calculated depending on the life of the business. The feasibility of a business can be determined on evaluation from the upfront ROAS.
ROI and ROAS are similar since they determine the returns on investments, which is the cost of doing business. Marketing strategies involve investments and when we look at traditional ways of marketing, ROIs are considered to calculate the feasibility. On the other hand, ROAS comes into consideration when looking at the amount spent on ads.
Return on investment is calculated simply by dividing the company’s net profits with the total investment injected into the business. The profitability of a complete business can be determined using the ROI and it can also be done separately for each investment. For example, if a business is expanding, and ROI can be calculated for the new office. Or a marketing campaign for a special occasion can also determine how profitable it has been for the business.
Executives who have the power to make important business decisions only show interest in ROIs. This is why their decision-making skills are quick as they are based on the profitability of different ventures. No constructive feedback can be given to the employees unless more money is injected into a new venture. ROIs are, therefore, all about working with numbers and looking at the feasibility and profitability of a business.
As it has been made clear about what ROAS is, let us look at the facts that make it different from ROI. For starters, ROAS uses revenues to calculate the expenditures on advertising as opposed to profits in ROIs. Secondly, ROAS only considers the amount spent directly on advertising. Other factors like costs and expenses of the business are not taken into account.
Therefore, ROAS shows a business if the digital advertising efforts have led to driving impressions, clicks, generating leads, and in the end: revenue. This way, every single advertising campaign can show results in terms of value. What this metric will not be if your marketing department is making effective decisions.
The return on ad spend is equal to the total conversion value divided by the advertising costs. Look at the following example for a better understanding.
An e-commerce business spends $100,000 on a Google AdWords campaign that leads to generating $250,000 of sales of one product. The revenue generated is $250,000 while the advertising costs $100,000. Using the formula mentioned above, the ROAS will be 250,000 divided by 100,000 which equals 2.5.
A ROAS of 2.5, a value greater than 1 means that the business is doing well. Any business that has a ROAS greater than one means that they can cover their marketing costs with revenue. A desirable ROAS can be greater but again that depends on the size and age of the business in question.
Businesses always look for ways to increase the returns on investments. Whether it is the ROIs or the ROAS, everything can be optimized and maximized by using a few tips. Here are the best ways which can help you maximize your ROAS.
This is self-explanatory. As more people use their smartphones to engage with websites and social media, your website must be perfectly optimized for mobile use. Having enticing ads for your product or service is not enough. If a website is not seamless on a mobile phone, all the marketing efforts would go to waste. If you are looking to improve your conversion rates, look for ways to improve load times, make the shopping experience better and overall convenient for users.
The importance of keywords cannot be emphasized enough! Refining the keywords to target an audience would lead to a higher conversion rate. Optimization of product pages can be achieved by using long-tail keywords that attract high-quality traffic. Using keyword discovery tools and Google trends can help you narrow down targeted keywords.
Geo-targeting helps you target customers who are present at a specific location. If you have a physical retail store and wish to make online sales, use geo-targeting. This way, your audience will only come from nearby areas where you can easily deliver. This helps you pay for clicks that matter. No business wishes to pay for something that does not lead to any in returns. Similarly, if you have a business that only delivers to specific countries, using this tool can help you target customers from only those countries.
Spying on the competitors can lead to fruitful results. This can also help you identify the right keywords, the business ranking, and the advertising strategies they are using. It does not mean that you are cheating or copying what the competition is already doing. This will only help you expand your mind and come up with campaigns that work.
Getting clicks is only half the story. What you need is an impressive landing page that leads to higher conversion and lower bounce rates. The landing page should be in line with the ad copy, for example, if you are showing an ad for red-rimmed eyeglasses, the landing page should lead the visitor to the same eyeglasses. Being sent to a webpage that does not contain the same product or service can lead to a frustrated customer.
The only way to ensure that visitors convert to customers is by strategizing CRO in every campaign. The global cart abandonment rate of e-commerce businesses around the world is a shocking 75.6%! Optimizing the conversion path from start to finish would decrease the cart abandonment rate of your business website.
The ad copy should adapt to the seasons and never stay stagnant on one thing. Tailoring the ad copy to align with the holiday season and other events will ensure higher conversion rates. This positions your product or service perfectly for customers looking for specific needs.
PLAs appear on a Google search when a searcher uses high-intent keywords. It appears as a list of product photos that are linked to the search of page results. A study revealed that PLAs have grown as much as 52% over the year. About 164% increase was on mobile PLAs that directly improved the ROAS by 23%. To create an effective PLA, the product description must be apt with the right keywords.
Several tools measure and report ROAS. However, Google ROAS tracking is easy to set up and quite detailed to help businesses. Using Google Analytics, the reporting of ROAS is easy to understand. Here is how to track ROAS on Google:
Google uses the same formula to calculate your ROAS as we have seen before. The total revenues are divided by the amount spent on ads. The line graph will also show the trends over a certain time period. This allows businesses to consider which ads worked well and which ones did not.
Moreover, using Google Analytics can also help businesses consider the competition keeping the trends of the world in mind. It is a great way to see how your business is doing when there are spikes in the world economy. Other factors that many business owners may overlook will be factored in when studying the line graph.
In today’s digital world, it is important to invest heavily in digital marketing campaigns to engage and reach a wider audience. However, businesses cannot just spend mindlessly without calculating the results. ROAS is an ideal way to gauge the impact of advertising campaigns directly on revenues.