Return on Ad Spend (ROAS)

Why is return on ad spend (ROAS) important?

ROAS is an important indicator of the effectiveness of your advertising campaigns to market your business, providing information into how well your ad spend translates into actual sales or conversions.

ROAS is particularly important in digital marketing, where businesses have access to a wealth of data about their advertising performance. Understanding ROAS helps marketers optimize their ad spend, allocate budgets, and improve the overall efficiency of their campaigns.

So why is ROAS important to measure? It directly links ad campaign costs to revenue generation. This allows marketers to:

• Evaluate the performance of individual campaigns or ad groups
• Compare the effectiveness of different advertising channels
• Make data-driven decisions about budget allocation
• Justify advertising expenses to stakeholders

How to calculate return on ad spend (ROAS)

The basic formula for calculating ROAS is:

ROAS = Revenue Generated from Ads ÷ Cost of Ads

Let's take a look at an example of how you would calculate ROAS:

If a flower shop spends a total of $1,000 on advertising and generates $5,000, their return on ad spend is 5. ($5,000 ÷ $1,000).

According to the ROAS formula, the flower shop generated $5 in revenue for every dollar of advertising spend, resulting in a ROAS of 5:1.

However, let's say another advertising campaign cost $2,000 and generated $1,800 in revenue. In this case, ROAS is 0.9 ($1,000 ÷ $2,000). In this scenario, the ROAS is less than one, meaning the business is losing money for every dollar spent.

What constitutes a "good" ROAS varies based on the industry, business model, and company goals. Generally, a ROAS of 4:1 or higher is considered good for many businesses. However, some industries with high profit margins might aim for a lower ROAS, while others with slim margins might need a higher ROAS to be profitable.

It's important to note that while high ROAS is desirable, it shouldn't be the only metric considered when evaluating the success of your marketing campaigns. Factors such as brand awareness, customer lifetime value, customer acquisition cost, and overall marketing strategy should also be taken into account.

Factors that influence ROAS

Several factors can significantly impact your return on ad spend. Understanding what influences your campaign can help you optimize them and improve your overall ROAS:

Targeting

The accuracy of your audience targeting can affect ROAS. Well-defined target audiences can lead to higher conversion rates and, consequently, better ROAS. This means it's important to understand your ideal customer profile and use the right targeting options provided by ad platforms.

Ad creatives

Ad design and content significantly affect customer engagement and your ROAS. Compelling ad copy, attractive visuals, and clear calls-to-action can improve click-through rates and conversions, both of which can influence return on ad spend.

Ad platforms

Different advertising platforms (e.g., Google Ads, Facebook Ads, LinkedIn Ads) can yield varying results depending on your target audience and product or service. Each platform has its unique features, audience behaviors, and cost structures that can influence your ROAS calculations and outcomes.

Landing page quality

Once someone clicks on your ad, the quality of the landing page they arrive at can significantly impact conversion rates. A well-designed, relevant, and user-friendly landing page can improve your ROAS by increasing the likelihood of conversions.

Seasonality and market conditions

External factors such as seasonal trends, economic conditions, and competitive landscape can affect your ROAS. For instance, during peak shopping seasons, you might see higher conversion rates but also face increased competition and ad costs.

Product pricing and margins

Your pricing strategy and profit margins directly impact ROAS. Higher-priced items or products with better profit margins can potentially yield a higher ROAS, assuming the conversion rates remain consistent.

Ad relevance and quality score

Many ad platforms, like Google Ads, use quality scores to determine ad placement and cost. Ads with higher relevance and quality scores often enjoy better ad positions at lower costs, potentially improving ROAS.

Conversion rate optimization

Ongoing efforts to improve your website's conversion rate can significantly boost your ROAS. This includes optimizing your sales funnel, improving site speed, and enhancing the overall user experience.

Optimizing return on ad spend

You're not stuck with your ROAS once you get it; you can always work to improve it. Improving your ROAS is an ongoing process that requires constant monitoring and optimization.

Here are some strategies to help you maximize your return on ad spend:

Refine audience targeting

Regularly analyze your audience data and refine your targeting parameters. Use tools provided by ad platforms to create lookalike audiences based on your best customers. Experiment with different demographic, interest, and behavioral targeting options to find responsive audience segments.

Conduct A/B testing

Continuously test different elements of your ads, including headlines, ad copy, images, and call-to-action buttons. A/B testing can help you figure out what elements work best with your audience and can significantly improve ad performance and ROAS.

Optimize ad placement and bidding strategies

Experiment with different ad placements and adjust your bidding strategies based on performance data. Consider using automated bidding strategies offered by ad platforms like Google Ads, which use machine learning to optimize bids for better ROAS.

Improve landing pages

Remember, it's not just the ad that influences ROAS; the landing page your ad leads potential customers to can make or break your media strategy.

Your landing pages should have a clear value proposition, easy-to-use forms, and fast loading times. A/B test different landing page elements to continually improve conversion rates.

If your landing page is lacking, your ROAS will be lower, especially for lead generation campaigns that often rely on a secondary landing page to collect customer information.

Focus on high-performing campaigns

There's no reason to continue investing in an ad campaign that is losing money or performing worse than other ads, especially if you're using the same platforms.

Give more budget to campaigns and ad groups consistently delivering a high ROAS. Consider pausing or adjusting low-performing campaigns to redirect resources more effectively.

Leverage remarketing

One of the best ways to optimize your advertising costs is to use remarketing campaigns that target those who have previously visited your website or interacted with your ads.

These campaigns often yield higher conversion rates and can significantly improve your overall ROAS because they're only shown to individuals who have already shown an interest in your offerings.

Use ad extensions

Take advantage of ad extensions offered by platforms like Google Ads. These can include site links, callouts, and structured snippets, which can improve your ad's visibility and click-through rates without additional cost.

Monitor and adjust keyword strategy

Regularly review your keyword performance for search ads. Focus on high-performing keywords and consider adding negative keywords so your ads won't show up for irrelevant searches.

Improve quality score

Many ad platforms use a quality score to tell you how relevant your keywords, ad copy, and landing page are. This score is designed to measure the overall user experience of your ads and the pages they link to.

Higher quality scores lead to better ad positions at lower costs, improving your ROAS.

ROAS vs other metrics

While ROAS is a valuable metric for evaluating advertising performance, it's essential to understand how it compares to other key performance indicators (KPIs) and when to prioritize it.

Again, using the return on ad spend formula can give you insights into your campaign and how well your marketing budget is performing. Yet, it's not the only way you should gauge the performance of a marketing campaign. Other metrics you should always measure are:

Return on investment (ROI)

ROI considers the total investment in ads, not just the operational costs of ad spend. While ROAS is more specific to advertising effectiveness, ROI gives a broader view of overall profitability, considering other factors like the cost of overhead and other marketing expenses.

The formula for ROI is: ROI = ( net profit ÷ total investment) x 100.

Cost per acquisition (CPA)

CPA measures the cost of gaining a new customer or conversion. While ROAS provides insight into the revenue generated from that acquisition, CPA is useful for understanding how cost-efficient it is to acquire new customers.

The formula for cost per acquisition is: CPA= total ad spend ÷ number of conversions.

Click-through rate (CTR)

This metric tells you the percentage of individuals who click on your ad. While CTR is important for understanding ad relevance and appeal, ROAS goes further by measuring the actual revenue generated from those clicks.

For instance, your CTR will tell you how many people clicked an ad and made it to the landing page, but those people don't necessarily convert. On the other hand, ROAS measures the actual revenue generated from your ad campaign relative to its cost.

The formula for click-through rate is: CTR= (number of clicks ÷ number of impressions) x 100.

You should measure each of these metrics, but there might be some cases where you prioritize ROAS, such as:

• E-commerce and direct response campaigns: ROAS is particularly valuable for businesses that can directly attribute sales to specific ad campaigns.
• Performance marketing: When the primary goal is to generate immediate revenue from advertising efforts, ROAS should be a key metric.
• Campaign comparison: ROAS is useful for comparing the effectiveness of different campaigns or ad platforms in terms of revenue generation.
• Budget allocation: When deciding how to distribute your advertising budget across different channels or campaigns, ROAS can provide valuable insights.

However, it's important to note that ROAS shouldn't be the only metric considered. In some cases, other metrics might take precedence:

• Brand awareness campaigns: For campaigns focused on increasing brand visibility, metrics like reach and impressions might be more relevant than ROAS.
• New product launches: Initially, metrics like CTR and engagement rates might be more important as you build awareness and interest.
• Long sales cycles: For B2B companies or those with complex, high-value products, metrics that track leads and pipeline value might be more immediately relevant than ROAS.

ROAS should be considered alongside other metrics for a comprehensive view of your marketing performance. Balancing ROAS with other KPIs helps develop a more nuanced understanding of your marketing efforts' impact on both short-term revenue and long-term business growth.

While ROAS is a powerful metric, there are several common pitfalls that marketers should be aware of when calculating and interpreting it:

Excluding all ad costs

One of the most frequent errors in ROAS calculation is not including all relevant costs. This might involve overlooking expenses such as agency fees or management costs, design and production for ad creatives, and technology or software costs associated with ad management.

Focusing solely on short-term ROAS

While ROAS provides valuable insights into immediate campaign performance, overly emphasizing short-term results can be misleading.

This approach might neglect the long-term value of customer acquisition. Consider other essential metrics like customer lifetime value (CLV). A campaign might have a lower initial ROAS but attract high-value customers who make repeat purchases over time.

Additionally, some campaigns might have a lower ROAS but contribute significantly to brand awareness and recognition, which can drive future sales.

Comparing ROAS across different platforms without context

Each advertising platform has unique characteristics, audience behaviors, and cost structures. Directly comparing ROAS across platforms without considering these factors can lead to misguided decisions.

For example, a B2B company might see a lower ROAS on LinkedIn compared to Google Ads, but the LinkedIn leads might be of higher quality and ultimately more valuable. Meanwhile, social media platforms might show lower ROAS for direct conversions but play a crucial role in the customer journey by building brand awareness and engagement.

Ignoring assisted conversions

Customers often interact with multiple ads before making a purchase. Attributing the entire conversion value to the last-click ad can undervalue other touchpoints in the customer journey. Consider using multi-touch attribution models to get a more accurate picture of each channel's contribution.

Overemphasizing ROAS at the expense of growth

While a high ROAS is generally desirable, focusing too heavily on this marketing metric can sometimes limit growth opportunities. For instance, maintaining an extremely high ROAS target might prevent you from exploring new audience segments or scaling your campaigns.

Neglecting to consider profit margins

ROAS focuses on revenue, not profit. Two campaigns might have the same ROAS, but if one sells high-margin products and the other low-margin products, their impact on the bottom line will differ.

Using inappropriate attribution windows

The time frame in which you attribute conversions to ads can significantly impact your ROAS calculations. Using an attribution window that's too short might undervalue ads that influence longer consideration cycles, while windows that are too long might overattribute conversions to older campaigns.

Maximizing your return on ad spend

ROAS is a tool for understanding how well your ads are working. Keeping an eye on your ROAS and making improvements over time can make sure you're spending your marketing money wisely and getting the most value possible.

To maximize your ROAS, adopting a data-driven approach to media planning is essential. This involves continuously analyzing campaign performance, testing different strategies, and refining your targeting and ad creatives. Use the insights gained from your ROAS calculations to inform budget allocation for future campaigns.

Remember that while ROAS is important, it should be considered alongside other marketing metrics to get a comprehensive view of your advertising performance.

Optimize your ROAS and other marketing metrics with Mailchimp. Mailchimp's comprehensive marketing automation tools can help you track campaign performance, segment your audience, and automate your marketing efforts.