Digital advertising has made global giants of several companies like Google, Facebook, and Twitter. That’s because organizations and corporations spend heavily on digital advertising.
The reasons are apparent; digital media has an extensive reach. But you don’t just want to throw money into digital marketing campaigns without measuring how successful your efforts are.
In a country where digital advertising takes up a huge chunk of spending by companies, it makes absolute sense to measure the effectiveness of such campaigns.
One metric that shows how successful a digital ad campaign is, is known as the Return On Ad Spend, or ROAS.
Digital advertising is a significant way of reaching out to customers, regardless of the sector.
You can reach more people via a targeted ad via Google than you will ever be able to do with a more traditional medium.
So many sectors now invest heavily in digital advertising. It is essential to know how to measure its effectiveness or otherwise.
Monitoring and measuring your Return On Ad Spend will help you make necessary adjustments or strategize on making it more effective.
We’ll look at what ROAS is in detail, how it is calculated, and the meeting point between ROAS and ROI.
Since ROAS can be figured out, we also want to know what a good ROAS would look like and how to improve it if it is poor or maintain it if it is excellent.
ROAS, as you would see, can also be used for comparing one ad campaign against another.
What is ROAS?
ROAS, as we said in the introduction, means Return On Ad Spend and is a calculation of the total revenue generated from an advertising campaign, in this case, digital advertising like pay-per-click.
It is a marketing metric used to measure an advertising campaign’s effectiveness.
This figure is beneficial in helping the advertiser determine if a campaign is effective or not and determine which particular type of campaign works so that it can be applied elsewhere.
Since ROAS is a metric term, it needs to be calculated, and doing so is pretty straightforward.
We’ll look at the mathematical details later on, but ROAS is calculated by comparing the amount spent on an advertisement campaign against the amount generated.
By comparing, you can determine how successful your advert campaign has been.
So, if a company spends, let’s say, $5,000 on an ad campaign and makes $25,000 in revenue, the return on ad spend would be a ratio of 5:1.
A low ROAS means that the message hasn’t been well received or the target audience hasn’t been reached.
Once the message reaches the target audience through the right channel, the ROAS would be high. The proof of every successful ad campaign is improved sales.
The entrepreneur has made $5 for every $1 spent from the example shown above. That means that the return on ad spend is $5. That is a sign of profitability.
Generally, a ROAS of $2 is considered good, which is twice the amount spent on advertising.
But, due to differences in advertising budgets and sizes of companies, it isn’t easy to measure a company’s success solely by its ROAS.
ROAS is helpful in online businesses in assisting them to evaluate which methods they need to retain and which should be changed in ad campaigns.
How is ROAS Calculated?
Now, let’s check out how ROAS is calculated. There’s a simple formula used to determine the figure.
Since ROAS is a metric that measures the efficacy of digital ad campaigns, you’ll need to know the gross revenue FROM the ad campaign and divide it by the cost of the ad campaign.
A simple formula for calculating ROAS would be Gross Revenue from an Ad campaign divided by the Cost of the Ad Campaign.
Using the example we outlined above, let’s say a shoe seller spends $5,000 on ad campaigns in a month and in that month, makes $25,000 in revenue; the ROAS for that campaign would be equal to:
- Gross Revenue from Ad campaign: $25,000
- Cost of Ad Campaign: $5,000
- ROAS = $25,000/$5,000
- ROAS= $5 or 5:1
This means that for every $1 this shoe seller spends on an advertisement, $5 is made. It looks like a pretty good investment!
However, this looks like a simplistic way of looking at it as you may not be able to determine the actual cost of an ad campaign from just how much was paid as a listing fee.
So many other things must be considered as well.
For example, in a pay-per-click campaign, you need to consider the number of impressions and the average cost per thousand impressions; you also have to consider affiliate commission fees, if there are any, and paid vendors you may have used to run the campaign.
But you should be able to get reasonably accurate data from your ROAS value.
So, you have the metric. What do you do with it? Improve on it. If your ROAS is below $2, you need to reconsider your strategy in the future.
ROAS vs. ROI
If you’re reading about ROAS for the first time, you surely have heard of ROI before. ROI is the return on investment. So, is there a difference between ROI and ROAS? Well, yes.
ROI is a measure of the profit generated by ads as a function of how much the ads cost. ROAS helps us know how much was generated for every dollar spent on advertising.
ROI accounts for the entire investment. Advertising is just part of the expenses that run a business, which can be termed an investment. If the return on investment is high, then the business is profitable.
You can calculate ROI by simply dividing the net profits by the total investment, including advertising. It is possible to segment each investment or add them together when you calculate ROI.
When you calculate ROAS, you are doing a separate ROI for the advertising campaign. Otherwise, you can do an ROI of the entire investment.
To get the return on investment, you calculate profits, and cost, look for the difference and then divide it by the cost, after which you multiply it by 100.
ROI = profits-costs x 100 / costs.
ROAS measures only the cost associated with ad campaigns, but ROI considers the entire amount spent running the business, including salaries, rent, research, transport, etc.
If the ROI is low, then the investment is not worth it.
What is Considered a Good ROAS?
Three factors determine what your ROAS should look like. There’s no universally acceptable figure because different companies have different budgets for advertising.
Some assume a ROAS of 2:1 is good enough, while that is a disaster to others. A good ROAS depends on the profit margins and the advertising channel.
Companies with a considerable profit margin may not mind a low return on advertising.
Some companies even invest in what they term “goodvertising,” which involves investing in campaigns that advocate for social issues rather than just promoting their products.
Such campaigns would not produce a high ROAS, but the high-profit margins of such companies would cover it. Moreover, such campaigns aren’t pursued to drive sales.
However, companies with low-profit margins would want every dollar to count. A low ROAS won’t be good enough.
Since the budget for advertisement won’t be much anyway, you want it to yield as much profit as possible.
But no company wants to throw money at ad campaigns for advertising’s sake. Sooner or later, regardless of how high the profit margin is, continuous low ROAS would lead to a review.
However, the average aim for most companies is a ROAS of $4, which is a ratio of 4:1
How do I Improve my ROAS?
If you want your ROAS to improve, especially if you don’t have the type of margins that may afford any low value, here are some steps you can take.
First, you should be sure that you have considered all the variables in arriving at your figure. Look at all the costs that are related to the campaign and put them into consideration.
Secondly, look for cheaper advert costs. If your ROAS is too low, you may need to explore opportunities for lower ad costs to boost the figure.
Also, try to focus on the right keywords. Every ad campaign thrives on the appropriate keywords. Such keywords are great ad campaigns because they generate more conversations.
If you invest in accessing the right keywords, you’ll attract leads and reduce the amount you spend on the campaign.
An advert campaign without investment in Keywords will not yield much in online ad campaigns. You can use keyword research tools to do this effectively.
Also, don’t forget to optimize page content. Your ad campaigns should drive leads to your page from where more engagement can occur.
If you sell on an online marketplace, you should be able to drive traffic to your site when customers search for content related to what you offer online.
As part of an effort to retain those attracted to your advertisement, create landing pages that promote your adverts.
Remember, the rule of landing pages is that they must provide a personalized experience to visitors and increase conversations.
You should also connect ads to relevant post-click experiences that can increase sales.
Every company that matters invests in digital marketing. Apart from increasing engagement and allowing you to reach the most people, it is an effective way of boosting sales.
ROAS is a way of finding out how effective an advertising campaign is. You can quickly know if the drive is successful or not, and you can decide to make the necessary improvements.