When it comes to evaluating the effectiveness of your marketing campaigns, calculating ROAS is a no-brainer. Although there are many other metrics available to optimize, ROAS should be an integral part of your analysis.
Return on ad spend is a term that refers to the return of investment you get from an advertising campaign. It has become an essential metric for digital marketers to analyze the effectiveness of their marketing campaigns. Using this method, businesses can determine the return they’re getting from every dollar spent on advertising.
A company can determine the types of marketing that are doing effectively so they can scale them to get the best results by looking at each campaign in detail by knowing their ROAS. Some people confuse ROI with ROAS. ROI stands for the amount you make after expenses, whereas ROAS assesses the gross revenue earned for each dollar spent on advertising.
If you haven’t touched on this metric before, you may be wondering: What exactly is it? What is a good ROAS? How does it work with your current marketing initiatives? And how to improve it. In this blog post, we’ll explore these questions and more.
What Is ROAS (Return On Ad Spend)?
Return on ad spend (ROAS) is one of the most significant key performance indicators (KPIs) used to measure the performance of your company’s advertising and marketing campaigns.
As a ratio or percentage of the amount of revenue generated from an ad campaign compared to the amount of money spent on it, the ROAS sheds light on how well your company is doing in converting ad spending into revenue.
When you perform a correct calculation (see How To Calculate Return On Ad Spend), you can see that a high ROAS indicates that your business is getting a good return on advertising investment, whereas a low ROAS means that you are not seeing as much of a return.
You can also use this calculation to identify which of your ad campaigns are successful and which ones need further optimization. In addition, ROAS can help you determine the most appropriate budget for your campaigns and decide which channels are most likely to generate the desired return on investment.
Why Is Return On Ad Spend (ROAS) Important?
First and foremost, ROAS can be considered an invaluable tool that provides a bunch of valuable insights into how your ad campaigns perform – and their overall impact on your business.
You should utilize the data & results you get by calculating ROAS so you can:
- make informed decisions about your ad campaigns and optimize them in order to maximize your return on investment (ROI),
- measure the effectiveness of your marketing initiatives to save money and increase revenue by ensuring that your ad campaigns are as effective as possible,
- understand the impact of your advertising budget on overall profitability,
- identify potential areas of improvement, such as targeting a different customer segment or increasing ad spend in certain areas,
- monitor your customers’ purchasing habits to optimize your marketing efforts accordingly.
This way, it would be much easier for you to create successful marketing campaigns to reach your targets as a company.
How To Calculate Return On Ad Spend (ROAS)?
You can calculate your ROAS by dividing the total revenue generated from an ad campaign by the total cost of the ad campaign.
For example, if you spend $2,000 on an advertising campaign and it generates a revenue of $10,000, then the ROAS is a ratio of 5 to 1 (or 500%) in this case. When you divide $10,000 by $2,000, you get $5, which means you generate $5 worth of revenue for every dollar you spend on its advertising.
Right at this point, there’s a couple of things you should consider when calculating the exact cost of running an advertising campaign to find the return on ad spend:
- Consider the costs of in-house advertising staff, such as salaries and other related expenses. If you don’t, the return on ad spend (ROAS) will be unreliable and less useful as a metric.
- Take into account the percentage of commission given to affiliates, as well as any network transaction fees.
- Include metrics like ‘average cost per click’, ‘total number of clicks’, ‘cost per thousand impressions’, and the ‘number of impressions purchased’ in your calculation.
Differences Between Return On Ad Spend (ROAS) And Return on Investment ROI
ROAS (return on ad spend) and ROI (return on investment) are two similar concepts in that they both measure the effectiveness of an advertising campaign in terms of the revenue generated in relation to the amount spent on the campaign. However, there are some key differences between the two metrics:
1. Calculation
The main difference is the way they are calculated:
- You calculate ROAS by dividing the total revenue you earned from the campaign by the total amount spent on it, which translates to:
ROAS = revenue from ad campaign / cost of ad campaign
- You calculate ROI by subtracting the total cost of the campaign from the total revenue generated by it and then dividing the result by the total cost of the campaign.
ROI = (net profit / total investment) x 100
Let’s see what these two terms offer with the help of an example:
“An online book store tries to increase their sales. Therefore, they invest $50 in advertising and this campaign generates $100 in revenue. In this case, the ROAS would be 2:1, or, 200%. On the other hand, if the campaign generates $100 in revenue and costs $50 to run, the ROI would be 100%.”
2. Output
Another key difference between ROAS and ROI is the type of output they provide. ROAS is a short-term measurement, as it provides information specifically about the effectiveness of an advertising campaign in terms of the revenue generated. This makes it a useful metric for tracking the performance of individual campaigns and for comparing the effectiveness of different campaigns.
ROI, however, is a more general metric that provides information about the overall profitability of a business, measuring the return from bigger marketing efforts. It takes into account not only the revenue generated by advertising campaigns, but also other factors such as the cost of goods sold, overhead costs, and other expenses. This makes it a useful metric for tracking the overall financial health of a business.
3. Reliability
ROAS and ROI are both indispensible indicators in making critical business decisions. Yet, as ROAS only evaluates promotional outlays, companies frequently contrast it with ROI to get a more thorough analysis of their overall performance.
For instance, an advertisement campaign may have a great conversion rate, but if the cost of each conversion is likewise substantial, you may confront a deficit in profits. By utilizing ROI in addition to ROAS, you can gain a better assessment by taking into account other outlayings, like conversion costs.
What Is A Good Return On Ad Spend (ROAS)?
‘What Is A Good ROAS?’ is a question that’s been boggling minds for a long time as it is one of the most important ones to ask in an effort to maximize the effectiveness of your advertising campaigns and your business’ overall performance.
First and foremost, it would be wise for you to calculate a minimum ROAS before launching your ad campaign. This will help you see how your ad campaign performs at the end of the day, and you will get results as soon as possible to optimize your next campaigns.
As stated earlier, you can calculate the ROAS either as the ratio or percentage of revenue generated from an advertisement to the cost of the advertisement. Basically, this lets you monitor how much money you make from your advertising efforts.
At this point, it’s important to know that a good ROAS will vary depending on the type of your business and the industry you operate in, as well as the advertising you utilize. While an ROAS of 3:1,which means you generate three dollars for every dollar you spend on advertising, or higher is considered good, an ROAS of 1:1 or lower is considered poor.
It is important to note that a good ROAS does not necessarily mean that a campaign is successful. For instance, if you spend a lot of money on advertising but can not generate enough sales, then the ROAS would be low even though your campaign was successful as you managed to make sales.
What Is A Good Return On Ad Spend (ROAS) For Facebook Ads?
You should keep in mind that a good return on ad for Facebook Ads depends on the objectives and goals of your business. Generally, an ROAS of 3:1 is considered a good benchmark for Facebook Ads, meaning your business secures a $3 return for every $1 spent.
You can better track & monitor the ROAS of your Facebook ads once you utilize Facebook pixel and conversion tracking. This provides valuable data to evaluate the performance of the ads and the overall impact of Facebook advertising on your business.
While it’s clear that every business might have a different set of objectives and ROAS expectations, it would be wise for you to target an ROAS that’s at least twice your original investment. That’s to say, if you spend $200 on Facebook ads, you should target a $400 return at least.
What Is A Good Return On Ad Spend (ROAS) For Google Ads?
A good return on ad spend (ROAS) for Google Ads can also change depending on a variety of factors, such as the industry, the product or service you offer, and your target audience.
However, a good ROAS for Google Ads is considered to be anywhere between 3:1 and 5:1. This means that for every dollar you spend on advertising, you can expect to generate between $3 and $5 in revenue.
On the other hand, a good ROAS may not necessarily be the same for every business. For example, a business selling high-end luxury products may have a lower ROAS due to the higher cost of their products, while a business selling lower-cost items may have a higher ROAS.
Additionally, the goals and objectives of a business also plays a role in determining what constitutes a good ROAS. To be more specific, a business that is focused on generating leads rather than immediate sales may be satisfied with a lower ROAS.
Overall, determining a good ROAS for Google Ads will require careful analysis and consideration of your goals. Therefore, it’s always a good idea to regularly review and optimize your advertising campaigns to ensure that they are generating the desired results.
What Is A Good Return On Ad Spend (ROAS) For Amazon?
A good return on ad spend (ROAS) for Amazon may be impacted by the type of product you are selling and the amount of competition you are facing in the marketplace.
In general, a good ROAS for Amazon is at least 2:1, meaning your ad spend is two times the value of your sales. This ratio can be higher depending on the type of product or niche you are selling and how much competition you face.
If you are selling a high-ticket item such as a laptop, a ROAS of 3:1 or higher may be achievable if you can target the right audience and create effective campaigns. On the other hand, if you’re selling a low-priced item with a lot of competition, an ROAS of 1.5:1 may be more realistic.
Ultimately, the key to achieving a good ROAS for Amazon is to experiment with different strategies and test different creative elements until you find the ones that work best for your products. Through trial and error, you will be able to optimize your campaigns and achieve the best ROAS for your Amazon business.
What Is A Good Return On Ad Spend (ROAS) For Etsy?
Just like the others, a good ROAS for Etsy depends on a variety of factors which may include the type of product you sell, your target audience, and the advertising medium you use.
Generally speaking, a good ROAS for Etsy is a rate of at least 2:1. This means that for every dollar spent on advertising, you should generate at least two dollars in revenue.
You should also consider the lifetime value of a customer at this point. This means that you should not only consider the immediate revenue generated from an ad but also the potential future purchases from customers who have been exposed to the ad.
A good ROAS for Etsy should also account for the cost of customer acquisition, as well as potential sales generated from referrals. By taking into account these factors, you can ensure that you make good use of your advertising budget.
How Is Return On Ad Spend (ROAS) Used In Mobile Marketing?
When it comes to mobile marketing, ROAS is a great way to measure the success of a campaign. It allows you to assess the performance of the campaigns and determine whether or not you are on the right track, getting the most out of your ad spend.
For example, you can calculate a minimum ROAS prior to launching any campaign in order to quickly determine if the performance is within an acceptable range. Also, you can use it to compare results from different campaigns to understand which ones perform better.
By understanding the ROAS of your campaigns, you can adjust your strategies and methods to maximize your return on investment (ROI). This can help you a great deal, especially when it comes to optimizing campaigns for different mobile platforms and devices.
5 Ways To Improve Return On Ad Spend (ROAS)
You know that running ad campaigns is essential for your business’ success. However, it’s not enough just to run campaigns; you should also make sure that your campaigns are optimized to improve your ROAS and get the best return from your ad spend.
Here is a list of 5 ways to improve your ROAS:
1. Apply the ROAS calculation correctly: Make sure that you are correctly applying the ROAS calculation and using the correct data for costs and profits. Then, review these costs and benefits to ensure that they accurately reflect your business’s input and output.
2. Evaluate and improve: Securing a desirable ROAS depends on a variety of elements. So, it is vital to evaluate which strategies, visuals, and channels are most effective and provide the highest value to customers. If you see that something is producing a ROAS that is low or negative, don’t hesitate to make changes or cancel the campaign completely.
3. Utilize predictive analytics: If you can map out how early actions within a funnel are related to later monetization, you will be able to improve ROAS drastically. Gaining insight into the processes in which your most profitable customers generate revenue within your website can be a huge advantage when optimizing the ROAS, as you can use this data to target ad campaigns instead of waiting for further signals down the line. This would stop any unnecessary spending and ensure that the potential revenue is met.
4. Re-engage: You can leverage re-engagement as a cost-effective way to increase customer loyalty, which can be fruitful, especially if performed through owned channels. As a marketing strategy focused on encouraging inactive users, customers, and subscribers to resume activity on a website, this can help you lower your ad spending.
5. Reduce advertising expenses: To ensure your ads are performing effectively, it is important to review the keywords you are using. If some certain keywords are costing you money without producing good results, it may be necessary to remove them. You can consider adding new keywords with a high search volume but low bidding cost. Also, it is a good idea to use the location targeting feature in Google Ads to use your budget efficiently.
Conclusion
In summary, return on ad spend (ROAS) can be an incredibly useful metric for you to evaluate the success of your ad campaigns. It allows you to track the performance of your marketing efforts and adjust your strategies accordingly.
While it is not the only metric to consider, understanding ROAS and incorporating it into your marketing strategies can help you to maximize your return on investment and ensure that your campaigns are efficient and effective.
I'm a co-founder of Analyzify and a seasoned digital marketing expert with over 13 years of experience. Passionate about helping Shopify merchants navigate data and marketing challenges.
