Marketing
May 23, 2022

What is a Good ROAS? How to Calculate Return on Ad Spend

Table of content

According to the latest data and market estimates, US digital ad spending will hit $239.89 billion in 2022. This would represent a 13.6% increase from 2021, during which digital ad spending totaled $211.20 billion. On this account, it's becoming increasingly important for businesses to have a metric that helps them measure and follow up on the performance and success of their digital ad campaigns.

Return on Ad Spend, usually known as ROAS, is one of the most popular financial metrics in the digital marketing industry. In principle, ROAS is quite similar to Return on Investment (ROI) as the easiest way for e-commerce businesses to evaluate how effective a marketing campaign is (or was). So, how do you maximize your returns? And what is a good ROAS?

What is ROAS?

In simpler terms, ROAS is the financial (and marketing) metric that measures how well a digital advertising campaign performs. Calculating ROAS allows you to lay down the performance and effectiveness of your ad strategies. It also allows you to identify techniques that work well and apply them to other advertising campaigns to reduce wasted ad spend.

It's worth keeping in mind that a high ROAS does not always imply more profit since the business bears other expenses to generate revenues. Despite that, ROAS is still useful for drawing the correlation between the revenue generated and advertising efforts. ROAS is also pretty handy when comparing the performance and effectiveness of one ad campaign to another.

Why Does Return on Ad Spend Matter?

Insights from calculating your ROAS across all your campaigns, in addition to customer lifetime value, give you actionable data to optimize your ad spending and maximize your returns. The data informs future advertising costs and strategies and steers marketing direction overall. Keeping keen tabs on ROAS helps you make informed decisions on where to focus your advertising spend and how that can be made more efficient.

How to Calculate ROAS

The ROAS formula is quite straightforward. ROAS equals the total revenue generated from an ad campaign divided by the amount spent on advertising.

ROAS Formula

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Calculating ROAS shows what a company or business earns back on average for every dollar it spends on an ad campaign. ROAS is typically expressed as a dollar amount. For instance, if your ROAS equals $3, that means your business makes $3 for every $1 you spend on advertising.

When estimating the total revenue generated from an advertising campaign, a company needs to account for a few factors. One, how much a new lead is worth to the business, and second, the total profit margins for different purchases.

It's equally important to evaluate whether you're making a good, average or bad return on ad spend. It allows you and your team to establish a benchmark for your advertising strategies and shows you where to improve future ad campaigns.

What is Considered a Good ROAS?

Micheile Dot Come | Ad Spend & Profit

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Return on Ad Spend is directly connected to the profit margins. Furthermore, ROAS is also affected by a business' operating expenses and its overall revenue. Therefore, there's no "right" answer to what a good ROAS is.

That being said, a ratio of 4:1 is considered the industry benchmark. That means companies aim to generate $4 ad revenue from every dollar they spend on digital ads. However, the average ROAS for most businesses falls around the 2.87:1 ratio -$2.87 in revenue for $1 ad advertising costs.

Remember, a good ROAS ratio is directly proportional to the company's set profit margins and defined budgets. New businesses in the market may consider pursuing higher margins. Conversely, existing online businesses intending to grow and scale up can opt to set higher advertising costs, especially if their online sales are above average already.

It follows then that some businesses need a higher ROAS ratio, say 10:1, to generate profits. On the other hand, others can grow at a fairly stable rate in just a 3:1 ratio. Ultimately, it's much easier to evaluate how good a business's ROAS is depending on its specific goals.

What Determines a Good Return on Ad Spend?

A good ROAS varies from one business to the other. To determine what a good ROAS for your business is, you need to figure out the following details:

  • Your industry
  • Your profit margins
  • Your average cost-per-click (CPC)

Other key factors you should pay keen attention to include:

  • What is your product's lifecycle (the rate at which a purchase is repeated) and average purchase price?
  • Brand and category maturity. Is your product or service already known and established in the market?
  • How strongly is your brand optimized for conversion? Is your brand (or product) interesting enough for your target audience? Do you have an engaging website that retains and converts visitors?

ROAS vs. ROI

Naturally, Return on Investment (ROI) also comes to most people's minds when working around ROAS. For starters, both help to determine the cost of doing business. However, these two metrics evaluate different aspects of a campaign.

On the one hand, ROAS calculates how much a business makes on average from advertising campaigns only. On the other hand, ROI calculates how much a company makes from advertising and/or other channels after expenses, including operational costs and turnovers.

In other words, ROAS measures the average return from advertising, whereas ROI measures the total return from advertising. Here are the formulas for each metric to put it into perspective:

  • ROAS = Revenue/Cost
  • ROI = Net Profit/Total Investment * 100

10 Ways You Can Maximize Your ROAS

Nataliya Vaitkevich | Maximum Return on Ad Spend

Image Source: unsplash.com

Every business is always looking for a way to increase its return on investments. Both ROAS and ROI can be optimized for maximum returns using a few trusted techniques. Here are a couple of handy strategies that can maximize the performance of your ad campaigns and boost your ROAS to new heights:

1. Branded PPC Campaigns

A branded PCC campaign looks to target your company's name to help the business make better returns from your advertising campaigns. Branded searches are quite effective because users searching for a brand usually want to reach out to the company directly or make a purchase, thus generating conversions and sales.

2. Better Mobile-Friendly Website

This is easily self-explanatory. More people use smartphones to engage with the internet, so your website should be perfectly optimized for mobile users. Having enticing ads for your business is simply not enough nowadays.

If your website is not smooth and user-friendly on a mobile phone, all your marketing efforts may go to water. Therefore, if you're keen on boosting your conversion rates, find ways to improve load times, enhance the shopping experience and make your platform convenient for users overall.

3. Refined Keyword Targeting

The importance of keywords in digital marketing cannot be emphasized enough! Refining your keywords to target an audience usually leads to higher conversion rates.

You can optimize product pages using long-tail keywords that draw in high-quality traffic. Keyword discovery tools and Google trends are great resources for narrowing down targeted keywords that suit your business.

4. Negative Keywords

Negative keywords are also useful for improving your ROAS. Negative keywords block your ads from appearing in online searches that feature those keywords. Albeit similar to your targeted keywords, negative keywords tend to extend beyond the scope of your products, services or business in general.

5. Optimizing Landing Pages

Getting clicks on your ads is only half the story. You also need an outstanding landing page that improves conversion rates and lowers bounce rates. Ideally, an impressive landing page should align with the ad copy.

For instance, if you're showing an ad for eco-friendly summer sunglasses, the landing page should direct a visitor to the same sunglasses. Sending the visitor to a webpage that doesn't have the product or service shown usually leads to a frustrated (or annoyed) customer.

6. Geo-Targeting

Geo-targeting allows you to target customers from a specific location. Geo-targeting is particularly effective for businesses with physical retail stores that want to make online sales. That way, the target audience comes from nearby areas where delivery is much easier and more convenient.

Similarly, if your business only delivers its products (or services) to specific countries, geo-targeting can help you reach customers from those countries only. This technique helps you pay for clicks that matter.

7. Keep an Eye on Your Competition

Keeping a close eye on your competitors can also give you a crafty edge in the market. It helps you identify keywords, business rankings and advertising strategies that are working for your competition.

However, this does not imply cheating or copying exactly what your competitors are already doing. On the contrary, it helps you expand your thinking and strategies to come up with productive ad campaigns.

8. Use Conversion Rate Optimization (CRO)

The global cart abandonment rate for e-commerce businesses is a shocking 80%! Therefore, having a good strategy is the only way to make sure you convert visitors to customers. This involves optimizing your conversion path from start to finish to reduce the rate of cart abandonment on your business website.

9. Seasonal Offers

A good ad copy adapts to the seasons and never stays fixed on one thing. Tailoring your ad copy to tie in with a holiday season or other important events can lead to higher conversion rates. It aligns your products or services perfectly with visitors and customers looking for specific needs.

10. Product Listings Ads (PLAs)

PLAs appear on Google searches with high-intent keywords, usually as a list of product photos linked to the page results of the search. A recent study shows a growing increase in PLAs. This is largely a consequence of a whopping 164% growth in mobile PLAs that directly increased ROAS by 23%.

Creating an effective PLA usually involves having an apt product description with the right keywords.

How to Track ROAS on Google

There are several tools to monitor, measure and report return on ad spend. Google ROAS Tracking is usually the go-to option, as it's easy to set up and well-detailed to help businesses. Google Analytics also makes ROAS reports fairly easy to understand.

Stephen Phillips | How to Track Return on Ad Spend

Image Source: unsplash.com

This is how you can track ROAS on Google:

  1. First, link your Google Adwords account to your Google Analytics account.
  2. Add E-Commerce Tracking settings to your business account. Your ROAS metric should then appear on the business dashboard.
  3. Open Acquisition, then Adwords.
  4. Open Campaigns Report, then select the Clicks tab shown.
  5. Lastly, check your ROAS in the last column on your Google Business dashboard.

Google uses the same ROAS formula we went through earlier. Google Analytics also features a line graph that shows trends over certain periods, allowing a business to assess which ads worked well and those that did not.

Furthermore, Google Analytics can also help companies and businesses look at their competition depending on global trends. This helps them evaluate how they are doing when there are changes in the world economy. In addition, the line graph also includes other factors that most business owners may normally overlook.

Final Thoughts

In today's world, it's crucial for companies and businesses to invest heavily in their digital marketing campaigns to reach and engage a wider audience. Nevertheless, they cannot just splurge on ad campaigns without a metric to calculate results and measure success. Return on Ad Spend is an ideal metric to gauge the direct impact of ad campaigns on revenues.

Now that you understand how to calculate ROAS and all that it entails, you can determine what marketing strategies work and those that don't. Furthermore, Return on Ad Spend informs your future advertising budget and efforts. Just as important, ROAS helps you work out your business's optimum dollar amount.

Featured Image Source: unsplash.com

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