Even if it’s been a while since you texted in complete sentences (“OMG. IKR? LOL. TTYL!”), ROAS may be a new one for you.
Nothing wrong with that if you’re still in school or a contented resident of Cubicle Nation, but if you do digital marketing, either professionally or to promote your brand, I’m a little worried for you.
ROAS stands for return on ad spend. It’s a metric that measures how much you earn from every dollar you spend on a single marketing channel, such as a campaign, ad, or even keyword.
It answers the question, “If I put X amount of money into Google Ads, Bing Ads, or Facebook Ads, how much will I get out of it?” If you’re running a campaign for a client, you can bet that this question will come up sooner rather than later.
Marketing is an investment just like stocks or bonds: if the dividends are lousy, it’s time to reassess your strategy and then reframe it or even try something else. You might also want to take a closer look at your marketing message: a poor return on investment can say a lot about how well it’s working.
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How to calculate ROAS
Whether your ad spend is invested in keyword search, email marketing automation, or social you don’t have to be a math genius to figure out how well your ad spend is going. For such a powerful and vital metric, ROAS is surprisingly simple to calculate.
There are two methods you can use. The first is to take the total value of all conversions and divide them by your advertising costs.
Let’s assume that on average, you’re spending $200 to sell something valued at $500. 500 divided by 200 gives you a ROAS of 2.5. In other words, for every advertising dollar you spend, you get $2.50 back.
That’s awesome. Multiply that 2.5 by 100 to get your % of return on ad spend which, in this example would be a whopping 250%
At first glance, that looks great. You’re more than doubling your money, unless… it costs you $200 in manufacturing, remote work teams, and shipping costs to fill the order.
So, for more transactions that involve back-end costs, this equation doesn’t give you a real sense of how much money you’re really making from your campaigns.
That’s when you might want to consider an advanced calculation of ROAS, which is subtracting your costs from your revenue before dividing it by your ad spend.
How to use the advanced ROAS calculation
Take the total revenue from (for example) a Google Ads campaign, subtract your additional fulfillment costs, and divide the result by total ad spend.
Using the example above, you’re investing $200 and making $500. 500-200=300. Divide that $300 by the $200 you spent, and you’re actually making $1.50 for every $1 you invest. You may not be losing money, and perhaps that’s enough. But you’re not raking it in either, so now is the time to decide precisely what you—or your client—want to achieve from this campaign.
Why ROAS is important
Maybe you’re thinking, “I’m already tracking click-throughs and conversion rates. Isn’t that enough to run a successful advertising campaign?”
Yes and no. While this tracking monitors traffic and conversions, making it easier to see how well you’re getting your marketing message across, it doesn’t really tell you how much money you’re making. The goal of all online advertising is ultimately to make money, and if you’re not tracking ROAS, you won’t know how profitable your campaign is or when changes are necessary.
So, what’s a good ROAS?
By now, you’re probably wondering what a good ROAS is. The answer will vary depending on your business model and what costs are involved in delivering your products or services.
Here’s a hypothetical example. Let’s assume that you live in Hamilton, Ontario, which is also known as the City of Waterfalls. You decided to capitalize on this claim to fame by operating a tour bus that takes people to all of the major waterfalls.
The bus seats 40 people, and you charge $30 per ticket. Thanks to word-of-mouth and direct sales via your website, you’re selling approximately 250 tickets per month, especially during the spring and summer. This means that you’re making $7,500 a month before expenses.
This is where you start feeling the pinch. With gas fill-ups, maintenance, and driver wages, each $30 ticket costs $15 to fulfill. There goes $3,750. When you take into account your fixed expenses, like tour office rental, bus loan payments, and other necessary monthly costs, you’re actually left with a $500 deficit!
So, you decide to run an online ad campaign in the spring to drum up ticket sales for the summer. What ROAS do you need to make the ads worth the investment?
If you made one $30 ticket sale for every $30 you’re spending on Google AdWords, you’re breaking even, right?
Nope. If you’re only making as much as you spend, not only will you never overcome that $500 deficit, but you’re likely going to lose money in the fulfillment costs associated with each ticket.
If you spend $15 to sell a $30 ticket, that’s better. You can offset those fulfillment costs, but what about the $500 deficit resulting from your fixed costs? You’re still in the hole, so to speak.
With a ROAS of 3:1, you’re doing better. You’re only spending $10 to produce a $30 ticket sale. Now you’re pretty much breaking even, which is excellent, but you’re not really profitable. Yet.
Once you reach the point that you’re getting $4 in revenue for every $1 you spend on your ad campaign, you’re starting to do well. 4:1 appears to be the recommended ROAS goal for most businesses. While the minimum threshold for profitability will vary from one business type to the next, the consensus is that once you reach 4:1, your online marketing is becoming profitable. Anything above that, and you’re soon going to be ready for expansion!
Generally, you’ll be in pretty good shape here. But, this is not a one-size-fits-all metric as some business types need as high as a 10:1 ROAS to be profitable!
If your ROAS isn’t reaching your calculated ratio to make your business profitable, you can fine-tune some ad techniques to improve your ratio.
How to improve your ROAS ratio?
There are only two digital variables that can help you to improve upon your ROAS; maximize your revenue or lower your ad costs.
Maximize revenue by conversion
Here are three excellent ways how to maximize revenue by converting as many visitors as possible:
- Adjust audience targeting by classifying user segments that are expected to turn into buyers with an elevated customer lifetime value and display products that are most applicable to each segment.
- Tweak ad copy and ensure that it addresses the correct audience segment. Emphasize ad urgency (think Google’s countdown tool) and any promotions to garner attention.
- Better your campaign Quality, which indicates to Google that your ad and landing page are the most relevant for consumers—this will help your ad display higher for appropriate searches and drive better quality traffic.
Pro-tip: use a smart project management software to better manage your campaigns and ensure quality from the get-go.
Decrease the cost of your ads
The second variable in the ROAS equation is to decrease the cost of your overall campaigns by ‘trimming the fat’ to obtain higher quality clicks at a lower price.
- Find a sweet spot between cost and competition of keywords by being smart about the keywords you are bidding on. Sometimes the best-performing keywords may generate a ton of clicks and traffic, but they are insanely competitive—this can increase your cost-per-click and reduce your ROAS considerably.
- Did you know that 34% of sales and marketing leaders believe that AI will have the biggest improvement in the customer’s digital experience? Don’t be afraid to use automated bidding. Google is bright, maybe too bright. So, don’t be scared to use AI-driven smart campaigns. They will empower you to react to searchers’ actions almost in real-time to optimize your campaign through the use of smart automation platforms.
- If your service or product allows, display your pricing right in the ad. This will allow you to filter out customers that don’t fit within your pricing model, so you aren’t paying for them to window shop.
ROAS is one of the most reliable metrics for determining whether your online marketing is doing what it should, which is to increase your revenue. It’s relatively easy to calculate, and the insights can help you turn a business that’s barely breaking even into one that’s hugely profitable. KWIM?