Many online marketers would argue that the return on ad spend, or ROAS, is one of the most important metrics for online advertising. It basically answers that important question “If I spend x amount of money on a campaign, how much will I get back?”
If a marketing campaign isn’t providing the profit you need to sustain your business, what’s the point? It’s no good paying out $10,000 for a campaign which only returns $500—you won’t be in business for too long with results like that.
In this guide, we’re going to look at the definition of ROAS and how it differs from that other important metric, ROI, or return on investment. In addition, we will look at how you calculate your ROAS and how you can track your ROAS in online ad campaigns.
Are you getting enough return from your spend on ads and what sort of ROAS goals should your business be aiming for? Grab a coffee and let’s dive in.
What Is ROAS?
ROAS, ROI, CTA, PPC—internet marketing is full of abbreviations: sometimes it feels like we’re reading a foreign language. ROAS, however, is one four-letter acronym you are going to want to remember.
In many ways, ROAS is very similar to that often-used marketing metric, return on investment, or ROI. If you were in business before the digital age struck, you will already be very familiar with ROI—things were so much simpler in those days!
Whereas ROI can be used to evaluate the total effectiveness of your marketing, ROAS can be used for the effectiveness of a specific campaign.
ROAS is preferred by many online marketers as an incredibly flexible way of evaluating any individual aspect of your marketing campaign. Was that last Google PPC search campaign worth your time and money?
How to Calculate ROAS?
The quick answer? You can use our free ROAS calculator here.
But let’s go a little deeper on how it works…
It’s all very well knowing what ROAS can help tell you, but how do we know what our ROAS is? Unlike many other marketing metrics, ROAS is very simple to calculate. The basic equation is:
(Revenue/Spend) = Return on Ad Spend (ROAS)
For example, if you spent $10,000 on a paid search campaign in October and it generated a revenue of $40,000, your ROAS is 4:1.($40,000/$10000=$4). For every dollar spent, you got $4 back.
However, there is a debate on how to best calculate your actual ROAS. Many experts recommending deducting the cost of your marketing campaign from the revenue first.
It’s not just about what you physically spend on the ads, but also if you paid someone to create them for you and other costs. While many would argue that this formula is closer to an ROI metric, those extra costs have to be accounted for, as they come from revenue.
It’s like saying that going for a beer costs you just $3, but what about the fuel used to get there and perhaps a parking charge? If you get a parking ticket, it’s a very expensive beer—you may as well have stayed at home.
How Do You Track ROAS?
Of course, a ROAS calculation is only as good as the figures you put into it. Although most online platforms will now track your ad spend, it’s up to you track the revenue an ad brings in.
If you run an e-commerce company, this can be fairly straightforward, as you can directly track which clicks result in a purchase. With Google AdWords campaigns, you can track purchases in terms of conversions, and see how much money a particular keyword, campaign, or ad group has produced.
Because ad spend and ROAS is so directly linked for e-commerce sites, many experts refer to ROAS as a purely economic metric. Fortunately, ROAS can also be a great metric for non-e-commerce campaigns or awareness ads—it can just be a little more difficult to track.
For companies not just looking for the sale of a physical product, the success of an ad campaign is usually measured in conversions. This could be the number of sign-ups to a webinar, creating a lead list for services you offer, or downloading a white paper—all of which could potentially lead to revenue.
If you’re using popular platforms, like Google AdWords, Facebook, Bing Ads or Twitter, tracking conversions can be simple. Most advertising platforms normally feature some type of analytics which can easily provide this information.
Where it gets more tricky is with telephone calls and conversions. Many ads will feature a number to call for more information, which doesn’t need a click. Google now features a built-in solution on AdWords for telephone conversions, but other platforms may need you to look at a call tracking service.
You might be surprised how many companies overlook those all-important telephone calls, even when they are their main source of leads. In my experience, only a quarter of companies have call tracking in place, so it’s a great way to get ahead of your competitors.
There are some phone calls we all wish we could forget, like those from our mother-in-law, but not potential revenue-generating leads.
Sales figures may not be as immediate as with e-commerce firms. The revenue data you can get from conversion tracking can give you those revenue numbers needed for your ROAS.
Once you have your conversion tracking set up on your specific online platforms, you can connect it to customer relationship management, or CRM, software. Companies like Salesforce, Zoho or copper offer packages that can connect all the online marketing data that leads to a conversion.
When that conversion, or lead, becomes a paying customer, you know exactly which campaign led to the sale. Although it can be more difficult than tracking revenue for an e-commerce site, ROAS data is incredibly useful and the insights are worth the extra effort it takes.
Why Use ROAS?
Stick with us, especially if you’re thinking that tracking ROAS can be too much effort. You may be thinking that you could just watch your click-through rate or conversion rates to optimise your online marketing campaigns and ads.
While strictly, you can, you may end up making the wrong decision if you’re only using this data. For most users, if not all, the whole point of online advertising is to generate revenue, not to drive traffic or even make more conversions.
If your online ads aren’t producing enough profit, you will need to change something about your campaign. But if you are not tracking your ROAS, you won’t know where the changes need to be made.
What Click-Through or Conversion Rates Can Tell You
A campaign with the highest percentage of CTR and the lowest cost-per-click (CPC) may seem like a successful campaign. However, if you’re a law firm, for example, and people are just clicking on your ads just to find jokes about lawyers—and there are plenty of them—it’s not a successful campaign, even with cheap clicks.
As click data doesn’t really tell us too much about the quality of our traffic, what about conversion data? If the conversion rate is low, with a low cost per click, some campaigns may outperform others with high conversion rates and higher costs per click.
So a higher conversion rate doesn’t necessarily mean a better return on ad spend, any more than a higher click-through rate. Perhaps the sites with higher click-through rates have that low quality of traffic we mentioned earlier.
Having said that, even low-quality traffic, if there’s enough of it, will eventually generate leads, often a solid increase too.
To determine the quality of the leads and whether a campaign is a financial success we need to look at the ROAS.
Why Return on Ad Spend Matters
ROAS is an essential tool for evaluating the performance of your ad campaigns and how they contribute to your bottom line. When combined with the customer lifetime value, the data you collect from ROAS can help you determine future budgets, strategy, or your marketing direction.
If you are experimenting with different online advertising platforms, ROAS can allow you to see which is best for your company. You may always assume Google is the biggest, and therefore the best, certainly for those new to online marketing, but does it have the best results for your ads?
Although we are constantly being told of the size of Google or Facebook, there are other platforms out there. I’m now regularly being informed that Facebook is now for “old people.”
So it may be time to check the ROAS of another platform, Instagram, for instance, which is supposedly “down with the youth”—especially if your product is aimed at a younger audience.
If your target audience is more likely to be using Microsoft platforms, it might be worth looking at Bing Ads. This is the default search engine on many Microsoft products, like the Surface line of hybrid computers. It can often be cheaper than Google, per click, and therefore, if it creates more sales, a higher ROAS.
What Is a Good ROAS?
There’s no simple answer to what the best ROAS is, this can depend on your company. Unlike most other metrics, like PPC used in online marketing, you want a higher number for your ROAS, not a higher cost. Your acceptable ROAS will be influenced by factors such as profit margins, your operating expenses and the overall health of your company.
When starting up, many companies will be strapped for cash and require higher profit margins to grow. Larger online stores that are committed to more growth can often afford higher advertising budgets and have a lower return on their ad spend.
A common ROAS benchmark is 4:1, or for every dollar spent on advertising, four dollars in revenue. Some businesses may need a ratio of 10:1 to stay profitable, while others can substantially grow at a lower, 3:1 ROAS. Your business will only be able to gauge its ROAS when it has a firm budget and a handle on its required profit margins.
When your company is making large margins, you can survive with a lower ROAS. Smaller profit margins are a sign you need to reduce your advertising costs and aim for a higher ROAS.
Basic business sense, isn’t it?
Don’t Forget the Extra Cost When Calculating ROAS
If only things were that simple, or as Kylie would put it, “I should be so lucky, lucky, lucky, lucky.” Unfortunately, your advertising cost is about so much more than just the listing fees. To calculate the true cost of running an ad campaign, you need to include the following factors:
- Partner or vendor costs. You will commonly find fees or commissions associated with the many vendors or partners who assist on your campaign. Accurate costing of these advertising personnel has to be included, to make sure your ROAS provides a true picture of a campaign’s efficiency.
- Affiliate Commissions. Network transaction fees or the percentage of commission paid to an affiliate will also affect the cost of your ad spend, and shouldn’t be forgotten.
- Clicks and Impressions. Metrics which include the average cost per click, the total amount of clicks, or the average cost per thousand impressions (CPM) also need to be included as a cost.
Again many people would argue this falls under the banner of return on investment, but can be an important part of ROAS if the costs are ongoing.
Using ROAS to Increase the Efficiency of Your Google Ads Marketing
With a ROAS goal in mind, you can change the amount you bid per click, to keep within your marketing budget. Rather than balancing your ROAS around a cost per acquisition (CPA) goal, you can balance it on revenue.
Getting back to the bidding, every keyword generates a specific amount of revenue. If you divide the total revenue by the number of clicks, you will find a revenue per click figure.
Once you know how much revenue each click produces, you can simply increase or lower your bids by a certain percentage, to hit your ROAS goal. Simply divide the revenue per click by the ROAS you need, to give you the spend at a keyword level.
If you really like the idea of bidding on a value based on ROAS goals, Google has an automated bidding strategy in AdWords. Just be careful if you choose this option, some algorithm bidding keywords can bring your bidding down too low and you may lose your crucial traffic.
ROAS is certainly one of the most useful metrics you can use to gauge the performance of your online marketing by. Hopefully, our guide to ROAS can help you check that your marketing is doing what it’s meant to do, driving new revenue.
When you are accurately tracking your business’s online marketing campaigns through the sales they generate, working out your ROAS can be relatively easy. The data your ROAS can give you could have a serious impact on your business and future marketing campaigns.
As a rule of thumb, a good ROAS should be $3 to $4. Below $3 you need to rethink your marketing strategy and you’re probably losing money. At $4 ROAS, your marketing is showing a profit and, above $5, your campaign is working pretty well.
Changing a marketing campaign can often be the difference between being a successful online business or a “This webpage cannot be found” statistic. A good ROAS lets you know that you, or the agency you are using, are going in the right direction.
If you have any questions to ask or comments to add, feel free to leave them below. If you need help calculating your ROAS or any other marketing advice, get in touch and we’ll see how we can help you.