Return on ad spend, or ROAS, is an interesting metric that some digital marketers forget to include in their analyses. If you’re working with search or other online ads, then you need to consider your ROAS, alongside your other key performance indicators.
This discussion will look at why ROAS matters to digital marketers and how you can use it to make stronger strategies that produce better results.
What Is ROAS?
Again, ROAS is your return on ad spend. This is similar to ROI, but it specifically measures your returns from advertising. More specifically, it is a ratio of how much revenue you’re creating based on the dollars being spent.
Here are two examples:
- Your ad campaign generates $4,500 total revenue from conversions for the month. The monthly cost for this campaign is $900. This results in a 5:1 ratio of revenue-to-costs. Your ROAS is 5, which means that for every dollar you spend, you’re generating $5 in revenue.
- Your CPA is $100, but you’re only generating $75 in revenue. This is an ROAS of 75:100, or 0.75. That is a negative ROAS that is costing you money! You’re actually losing $25 on each conversion.
Essentially, ROAS is a measure of how well you are spending your ad budget. A particularly low ROAS means that you may be spending more on keywords that aren’t returning great returns. A high ROAS signals that you’re doing an excellent job of finding low-cost, high-reward ad opportunities.
ROAS Versus ROI
ROAS shares a lot of similarities to ROI. Some marketers simply assume that it is just Google Ads way of putting a spin on ROI. In some ways, these marketers are correct. ROAS and ROI are very closely related. However, treating them as one in the same is a big mistake. There are some subtle differences that should be recognized.
- ROAS is used to measure specific details of your ads. You could measure the ROAS of an ad group or even a single keyword. ROI is typically used to measure broader returns.
- ROI can be used as a predictive measure. You can roughly estimate what the returns on a possible investment will be. ROAS, however, is what happens as a result of spending money on ads.
- ROI is typically a more exact measure that looks at several factors beyond simply costs and revenue. The ROI of your advertising strategy would include things like how much it costs to hire an ad specialist, any distribution or channel costs that your business needs to pay and more. ROAS, however, is typically a simpler measure that only takes into account the direct cost of your ads versus the revenue created from these ads.
The best way to define the difference between ROAS and ROI is that ROI measures the returns of your entire advertising strategy. ROAS measures the returns on a single component of that strategy.
What Is Considered A Successful ROAS?
If you’re just exploring ROAS as a metric, your natural inclination is to wonder whether or not your advertising efforts are returning a good, fair or poor ROAS. What sort of ratio should you look for?
It’s not an easy question to answer. In theory, any ROI above $1 is profitable, right? That said, you don’t want to be spending all that time and manpower just to return a few cents on the dollar.
Another way to measure a “good” ROAS is to go off of what Google reports is the standard. There is a popular statistic that is quoted from a Google Economic Impact Report that states “businesses make an average of $2 in revenue for every $1 they spend on Google Ads.” So ,you could reason that any ROI higher than 2:1 is above average.
The problem with taking the overall average of all Google Ads users is that ROAS benchmarks are different depending on the industry. For some industries, an ROAS of $2 is extremely low because the “norm” for businesses in that space is $4-5.
The short answer is you need to compare your ROAS to other companies in the same industry. There are some resources online where you can find benchmark ROAS figures for each type of business.
What Can You Learn From ROAS?
Why does ROAS matter? This is a cost-centric metric, which is always useful. Impressions, clicks, etc. are all fine and good, but they don’t get to the meat of why you’re creating ad campaigns in the first place. You’re trying to grow your business! You need to be very concerned with how costs are playing into the equation.
This is exactly why ROAS matters. Again, it is a measure of how efficiently you are using your ad budget. When you look at individual campaign components, down to the keyword level, you can use ROAS to measure profitable, very profitable, not so profitable and unprofitable keyword opportunities.
This is one of the keys to successful PPC management. You want to reduce your wasted spend as much as possible, while also maximizing the most valuable opportunities in your campaigns. These wins and losses will always change across different keywords and ad groups.
ROAS is a great measure to consistently find your least and most profitable opportunities. Then, you can adjust your spending accordingly. You know which keywords create a lot of clicks, impressions and conversions. With ROAS, you get a pretty accurate measure of value, which allows you to make stronger decisions and really optimize your ad spend.
Another way to utilize return on ad spend is to look across all of your campaigns and determine a benchmark or average ROAS that you can typically expect from your efforts. This gives you a fast measure of acceptable profitability for future ads and strategies.
Conclusions
To summarize, ROAS is a great way to use costs and returns to judge the performance of your ads. It should be used to analyze your advertising data, along with other measures like ROI and your key performance indicators. Remember, whenever you’re measuring performance, you absolutely need to put money into the equation. That’s exactly why ROAS matters in digital marketing.
Reference URL: https://ppcexpo.com/blog/what-is-roas
