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Ever wonder how much you're actually making from ads? When you're new to marketing with your business or company, paying for advertising can feel a little like shredding your hard-earned money.
But here's the thing: if you're doing your advertising efforts right, your ad campaigns should (literally) pay off.
So how do you know if you're running a successful marketing campaign? Use a handy metric called return on ad spend (ROAS).
In this article, we'll cover:
- What ROAS is
- How ROAS is different from ROI and CPC
- How to calculate the ROAS for your business
- What a good ROAS is
- Tips to improve your ROAS
What is ROAS? (Return on Ad Spend)
ROAS is a useful metric that marketers use to track the success of an advertising campaign. It tells you how much money you're bringing in for every dollar you spend on ads.
With a successful advertising campaign, you'd expect to make more than what you spent on the campaign. The higher your ROAS, the more you're getting out of your advertising money.
ROAS vs. ROI vs. CPC
In marketing, you've probably seen a lot of these acronym metrics – ROAS, ROI, CPC – and a lot of them are pretty similar. BUT they aren't the same. Each one has a different meaning and purpose. Let's break it down.
ROI stands for Return On Investment. This can be really similar to ROAS and some marketers will occasionally use them interchangeably, but they ARE different. Basically, ROI can be way broader than just the advertising spend.
While ROAS just focuses on an ad campaign, the cost for the campaign, and the amount of revenue generated from that campaign, ROI takes a more holistic approach through the whole business and also generally takes a more long-term approach.
When you're looking at ROI, you could be looking at the ROI of hiring an SEO who provides long-term value through organic search traffic that will continue to generate return profit over time. On the other hand, when measuring ROAS, you might look at your paid search traffic and how many conversions that's bringing in. Except if you stop paying for the ad, that extra return stops whereas the investment keeps giving even after you've spent the money.
Plus, in the equation for ROI, you subtract the investment payment you've made from the revenue to get actual profit return whereas you don't do that with ROAS.
In marketing, CPC stands for Cost Per Click. This is a form of measuring payment for an ad campaign generally through Google ads. Essentially, it tracks how many people actually click through your ad campaign and you get charged a certain rate for each click. This can help you identify your click-through rate, which is useful for judging the success of your advertising copy.
A CPC doesn't really tell you much about your ROAS, but you may end up using it for your ad spend to then calculate ROAS.
Why Ad Spend Matters To Your Business
Ad spend and return on ad spend means the difference between more or less money in your pocket. Here's why.
- Maximize ROI in marketing spend. If you track your ROAS, you can start to analyze what advertising costs are worth the money and invest in those. This means your ad investment return should increase.
- Identifying high-converting keywords. When it comes to Google keyword targeting, investing in the high-converting ones is the way to go – but identifying those keywords can be tricky. When you track the ROAS for each keyword, that becomes easy to measure then optimize for the best keywords.
- Understand your audience better. When you track your ROAS for different ad campaigns, you'll see which ones work best for your target audience and which ones didn't resonate. You can then use this extra data to touch up your buyer personas too.
- Discover new content opportunities. If a specific keyword or advertising campaign has an extra high ROAS, you can create more content around that topic. Basically, take a good thing and run with it.
- Inform future budgets. If certain ad campaigns aren't paying off or certain cost-per-click ads aren't getting the conversions you need, you can readjust your future budget to get better performance.
- Track how much ads contribute to your online store's total revenue. Ads can be a huge game-changer for any business and could seriously improve profit, but it's important to understand exactly how much they're contributing to your bottom line.
ROAS Formula: How To Calculate ROAS
The equation for ROAS calculation is surprisingly simple. It's just the total revenue the ad campaign made divided by all the advertising costs for that campaign.
What To Include When Calculating ROAS
To get an accurate return on ad spend number, you'll need to factor in several different numbers to get the full story. These are the main numbers you'll need.
- Revenue or profit from ad campaigns. To calculate ROAS, you need to know how much you made from the ad campaigns you're looking at – some marketers call this "conversion value". Generally, we'll measure this with revenue but it may also be worth doing the calculation with profits as well by subtracting out the base production costs for making the product.
- Partner and vendor costs. The cost for an advertising campaign isn't just the cost for the specific ad. You'll likely have vendor costs with creating the ad that you need to add to the total cost of the ad. Plus, if you've brought on a marketer to help run the campaigns, you'll want to factor in a part of their salary too.
- Affiliate commission. If you're working with bloggers, publications, or other advertising companies that take an affiliate cut, you want to be sure to factor in how much you'll be paying out to that and add it to the costs. Sometimes this can be up to 5 to 10% of each purchase so it's not something to ignore.
- Clicks and impressions costs. We've already mentioned cost per click, but you may also have a cost for the number of impressions the ad gets. If this isn't included in your original advertising cost, be sure to add it in there.
What’s A Good ROAS
This is the five thousand dollar question. Unfortunately, I can't give you a hard and fast number. Many marketing experts will say a 4:1 average ROAS (meaning for every $1 of ad spend, you get $4 revenue) is a solid base mark for ad spend, but a lower ROAS or higher ROAS might be fine for your business too.
So let’s say you have two different ad campaigns running at the same time and you spend exactly the same amount of money on them. In this example, let’s say you spend $100 on each ad campaign.
And let’s say that each ad campaign converts only 1 customer.
So the success of each campaign is basically the same, right? One hundred bucks spent, one conversion gained.
There is an additional factor that affects the equation: how much money your business actually makes from the ad campaign.
So if one campaign advertises an expensive product and the other advertises a cheaper product, the conversion with the expensive product will give you a higher ROAS.
And that will give your business a whole lot more bang for its buck, showing you how to make the most money with every dollar you spend on ads.
Relatively speaking, the higher the ROAS the better.
It really depends on different things such as how much extra money you have available, what your profit margin is, what your goals are for your advertising efforts, and the campaign type. For example, a Facebook ad will have a different ROAS than a Google PPC campaign and both will be different from a social media influencer partnership ad.
The most important thing when setting up your marketing effort is establishing what your business's specific ROAS goal should be and what your minimum ROAS needs to be in order for the ad campaign to be worth it.
How To Improve Your Return On Ad Spend
Now that you know your current ROAS and your target ROAS, it's time for the fun part: actually improving your ROAS. This is the time to delve into your metrics, review all your data, do some experimenting with your ad strategy, and eventually bring in more revenue from your campaigns and get a higher ROAS.
Basically, it's where things actually start to make a difference.
There are lots of different ways you can go about improving ROAS, but any form of improvement will fall into one of three categories:
- Increase revenue from ads without changing ad cost.
- Decrease ad cost while keeping revenue from ads stable.
- Increase ad revenue and decrease ad cost (the best of both worlds).
Within those categories, here are a few different ideas for improving your ROAS.
Improve Conversion Rate on Your Click-Through Landing Page
Tactic category: Increase Revenue
The best way to not get a good ROAS? Have your ad lead to a landing page that doesn't convert. If your website doesn't make it easy for customers to make a purchase, contact you, or do what you want them to do, you won't get good results.
I don't care if you have the absolute best ad in the universe, if you're landing page copy isn't working hard for you, your conversion rate will be low meaning your ad spending will do very little.
I'm gonna be real with you here – if you haven't looked at your website conversion or website copy, skip the ads and go talk to a website copywriter or conversion copywriter and get that on point first. This will be money well spent.
If your landing page generates more conversions, then using ads to direct people to that page will provide a much bigger return.
Tip: You can track the conversion rate of different pages on your site using conversion tracking on Google Analytics with this step-by-step instruction.
Focus on High Converting Keywords or Ad Platforms
Tactic category: Increase Revenue and Decrease Ad Cost
It might go without saying, but the campaigns with high conversions will give you a higher ROAS. Once you've started tracking your ad metrics, you can find the ad group (or groups) that's working best for your business and focus on that instead of wasting money on campaigns that aren't bringing in customers.
For example let's say your Facebook advertising has been off the charts amazing while your Pinterest campaign performance has been lackluster. If you cut the Pinterest ads and focus on your Facebook ads, you can potentially increase your reach to the high converting Facebook audience, while cutting some costs at Pinterest.
Improve Ad Quality Score
Tactic category: Decrease Ad Cost
With a Google paid search campaign, Google alters CPC based on your ad's quality score. The quality score measures how good your ad is and whether or not it's relevant to the keyword. Google rewards higher quality scores by offering cheaper paid search, meaning you can keep the number of ads you run while lowering the cost.
Use Negative Keywords
Tactic category: Decrease Ad Cost
If your ads are showing up for keywords that don't lead to conversions or don't target your ideal customer, you're wasting money. Enter negative keywords. With Google Ads, you can add in keywords that you don't want your ad to show up for – AKA the negative keyword.
For example, if you own a specialized ski shop that only works with ski gear and you don't sell gear for snowboarding, you might add snowboards or snowboard boots to your negative keyword list. That way, you aren't spending money on clicks from people who want snowboards and won't buy your skis or ski boots.
Narrow Target Audience
Tactic category: Decrease Ad Cost
This tactic can get a little tricky because you don't want to narrow your target audience to the point where you're cutting out valuable potential customers. However, similar to negative keywords, you don't want to be wasting your advertising budget on people who will never become customers.
If you're currently reaching a super wide range of people and your conversion rate isn't that high, you may want to look at your buyer persona again and see if you can target that audience a little more.
Increase Customer Lifetime Value
Tactic category: Increase Revenue
Say for each customer generated from ads became recurring customers and repeatedly made purchases. Suddenly, that ad's just become a lot more valuable because you're gaining the customer's entire lifetime value. Even if each customer just made the same purchase once more after the first sale, you've doubled your ROAS.
This can sometimes be tricky to track in metrics because you can't always connect a recurring customer to the original ad campaign, but there are ways you can track this metric through Google Analytics or your eCommerce platform (especially if you include a post-purchase survey).
If you're really struggling to track this exact metric down, you can also try to calculate an average lifetime value for each customer you acquire through ads (or in general) then use that metric to add to your ROAS for each new customer.
As with any marketing strategy, none of these tools and tactics are an exact science. You can definitely get pretty accurate measures and make a big difference to your company, but expect some fluctuations when you experiment, and don't be afraid to get creative with your ads.