Return on ad spend (ROAS) is a standard metric used by marketers to measure the effectiveness of their campaigns. With ROAS businesses can identify what methods are working for their businesses. Although we can use ROAS to calculate the efficacy of any business method, it is generally easier and more effective to be used in digital campaigns specifically for eCommerce. But just calculating ROAS is not worthwhile, we also should know how to improve the ROAS & before that there is one thing that should be on our priority list and that is to get to know what is a good roas.
What is ROAS?
Return on Ad Spend is a very important performance metric used by marketers while managing their paid campaigns be it on Facebook, Google, Amazon, or Etsy.
Specifically, this performance metric is majorly used by marketers in the eCommerce industry to find out how much return/revenue they’ve got on their spending. It’s calculated by dividing a company’s advertising revenue by its expenditure revenue.
Let’s say you’ve invested $100 into your eCommerce campaign and you generate $350 in revenue from the ads then your ROAS would be 3.5.
Sounds simple, isn’t it?
But now the question arises what is a good roas, its answer is still not clear for many marketers and account managers out there.
What is a good ROAS?
It is not very easy to comment on what ROAS is good as it majorly varies from industry to industry, product to product and more precisely depends on the profit margins. As the conversion rate varies from industry to industry likewise ROAS also varies from industry to industry.
If your profit margin is low then you’d need a high return on your spend that means a higher ROAS is required in that case to call your campaign a success.
On the contrary if your margin is high then even a low Return On Ad Spend(ROAS) would be affordable for your marketing campaign.
How to calculate ROAS
There is a simple formula that can help you in calculating the ROAS of the marketing campaign i.e.
ROAS = Revenue/Cost
The above formula will give you the idea of what Return on Spend you’re getting on your marketing campaign.
In the above formula,
Revenue = Total Revenue generated by your ad campaign.
Cost = The amount we spent on the marketing campaign
With the above 2 data we can calculate the ROAS by simply dividing Revenue with the cost. For instance your marketing cost was 5 and the revenue generated is 25 out of it then the ROAS comes out to be 5. Which means for every $1 dollar that you spend on your marketing campaign you’ll get $5 out of it.
Now, let’s talk about the another closely related term that people generally use i.e. ROI(Retun on Investment)
ROAS vs. ROI
Let us talk about ROAS first.
ROAS refers to how much your business earns from advertising itself dividing by the cost it took to earn the revenue for your business.
While ROI calculates how much your business earns(proft) from anything(even from advertising).
ROI = Revenue-cost*100/cost
Though it is very important to keep track of ROI of your campaign but it can’t help you much in telling whether your digital campaign was successful or not. However ROAS does more for your business by telling which campaign is successful and are generating sales for your business by your digital marketing company.
Why should ROAS matter to your business?
ROAS should matter to your business because of the following reasons.
- It gives you a benchmark for your ad campaigns.
- Help you in determining which is the most successful running campaign in your Ad-account.
- Helps in improving your Ad campaign by comparing your Return on Ad Spend with the industry standard ROAS.
Overall, ROAS should matter to your business because it can help you in figuring out your good or bad performing Ad-campaign so that you can optimize your campaign and improve their performance. Because just simply spending more money without optimizing the campaign based on the ROAS would be like giving your hard-earned money to someone who doesn’t need it.
How to improve return on ad spend?
You need to follow the below listed method to improve the ROAS of your campaign.
1 – Lower Ad Cost
Till now you’ve got a better understanding of the what ROAS comprises i.e. revenue they generate and the cost of Ads. So, you can optimize your Ad and lower your spend which can help you increasing the ROAS.
Pro-Tip: If you’re using Google Ads then make sure you have added the correct negative keywords as most of marketers add wrong negative keywords in their campaign. And also focus more on improving your quality score.
2 – Improving Right Landing Pages
You need to make sure that your landing page is perfectly optimized as per your target audience and is conversion oriented.
For eg. If you’re targeting the keyword “Best Real Estate Companies in New York” and your Landing Page is opening with the H1 as “Best Furniture in New York” then clearly it creates a bad landing page experience so avoid that.
You should always follow the right landing page experiences.
3 – Set the right bid amount
While setting up the bid amount you should make sure that you’re not getting carried away. As you don’t know what is the good roas number so placing the right bid amount is really very necessary, you should not be adding the bid amount on higher side as it would get your ROAS high. Neither you’d want to make it to the lowest as it might lead to no conversion.
So doing thorough research is really very important.
Frequently Asked Questions
What is a Strong ROAS?
There is no specific answer to this as in digital world it is believe that a ROAS of 4 is considered to be strong i.e. for every dollar you spend you’re getting $4 in return. But that too would vary from industry to industry.
Why is my ROAS great on some days and terrible on others?
You don’t need to review your ROAS on daily basis as on some days your campaign might do bad and on some days due to any exceptional reason like the season or whatever it is your campaign could do good. So, it is suggested to keep a 7-days average ROAS track.
What is a bad ROAS?
As a marketer if you’re spending money on your Ads and in return you are not getting any revenue then it is considered to be a bad return on investment or a bad ROAS. To give it a number 1 can be considered as a bad ROAS. It means if you’re spending $1 and generating $1 as a revenue then it could be considered as a bad ROAS.