If you bought Bitcoin on New Year's Day 2015 and sold it precisely six years later, your ROI would have been 15,000%. We'll give you a moment, wipe away the tears.
Bitcoin ROI may be out of the question, but ad spend return isn't. Return on ad spend (ROAS) is a crucial metric for marketers and business owners alike. An ROAS calculation can show you where you're winning — and where you need to pick up the pace.
This guide will discuss what ROAS is and how to calculate it. We'll also discuss how to increase ROAS to guide your future advertising efforts. If you're ready, let's get started!
What Is Return on Ad Spend?
Return on ad spend (ROAS) is a marketing metric defined as the total sales or leads generated from a specific ad campaign, divided by the amount spent. You can represent it as a percentage or a ratio (if you're feeling adventurous). It’s similar to (but not the same as) return on investment or ROI.
It shows how much money you've made relative to what you spent — that way, you know whether an ad campaign has been effective for your business thus far.
To calculate ROAS:
total revenue from ads / advertising costs = return on ad spend
For example:
If a company spends $200 and makes $500 in revenue from their ads over a certain period, they have an ROAS equal to 2.5 or 250%. In other words, for every dollar spent on the advertising campaign, they generated another $2.50.
How to Calculate Return on Ad Spend
To begin calculating your ROAS, you'll need several pieces of data. Make sure your ad campaigns are set up to be assigned a cost and revenue value. We can also include any one-time expenses associated with an advertising initiative in the cost field to see how much money was spent overall.
Say our client spends $300 per month on various online ads, which generate $3000 in monthly sales.
($3000) / ($300) = 10
Their ROAS is 1000%, or 10:1.
Return on Ad Spend (ROAS) vs. Cost Per Action (CPA)
It's important to note that return on ad spend doesn't necessarily mean your return per individual action (i.e., what you make every time a user clicks or performs an action, such as signing up for an email list). It's calculated by simply dividing the total revenue generated from the campaign by how much was spent in total.
ROAS vs. Return on Investment (ROI)
Return on investment (ROI) is another standard business metric often confused with ROAS. The two are similar but not the same.
ROI measures how much revenue or profit you get for each dollar invested in a campaign or venture. ROAS is the ratio of revenue generated by a campaign to its ad costs. In other words:
- ROAS = return on advertising costs
- ROI = return on investment or capital employed (often measured with profit, not revenue).
Both metrics are essential to track and understand, but it's crucial to know which one you're looking at to not mix them up.
How to Track Return on Advertising Spend
Image from Megalytic
There are a few different tools you can use to calculate ROAS:
One popular option is Google Analytics. GA can provide you with data on how much revenue your Google Ads campaigns have generated, as well as your costs. This makes it easy to calculate ROAS for each individual campaign. To create a custom column, divide Revenue (from e-commerce conversions) by Cost.
You can also use a tool like Mixpanel or Kissmetrics, which track user actions (such as signing up for an email list) and assign values to them. This lets you see the ROI for specific user actions instead of just overall revenue.
Tips for Increasing ROAS
Now that we understand what ROAS is and how to calculate it let's look at a few methods for increasing it.
Improve campaign targeting so you're reaching your ideal customer more effectively.
You can make your ad campaign targeting better by refining your audience and expanding the countries, languages, and devices that you're targeting. This will increase ROAS by making sure your ads reach people who genuinely want to buy from you.
Use remarketing lists for search ads (RLSA).
You can make ROAS much higher when using RLSA because these ads show up in Google searches and at the top of relevant websites' pages.
They catch consumers right before they start shopping around, so it's more likely that they'll convert into a sale. This is especially true when compared to someone who sees an ordinary banner somewhere else online where there isn't such heightened intent to purchase.
Make use of lookalike audiences.
Creating a lookalike audience is another way to improve your advertising and marketing efforts. One way to do this is by uploading a list of your current customers to Facebook so that it can create a new, similar group of people who have similar interests and behaviors to those on the original customer list.
Doing this will help you find more potential customers who are likely to be interested in what you're selling since they share similarities with your past buyers.
Segment your campaigns into different groups according to their ROAS goals.
This method lets you apply specific optimization techniques only to those campaigns that are below or above your desired ROAS threshold.
For example, if you want all advertising campaigns to generate at least 200% ROAS, you can set up your campaigns so that the ones who are below this goal receive additional spending and optimization, while those that have already achieved or surpassed it can be eased off a bit.
Do A/B testing to find what works best for your business.
A/B testing is the process of trying two different versions (A and B) of an element in order to see which one performs better. This could be anything from the subject line of an email to the color of a CTA button on a website.
By doing this type of experimentation, you can determine what's most effective for driving sales or leads and then scale up those elements that prove successful.
Optimize your website or landing pages for conversions.
Conversion rate optimization, or CRO, is the practice of making minor tweaks to your website or landing pages in order to increase the percentage of visitors who convert into leads or customers.
This could be something as simple as changing the text on a button, adding an image slider, or reorganizing the layout of your page. Test out different changes and see which produce the best results for your profit margins.
Use dynamic retargeting.
Dynamic retargeting is a type of marketing campaign that specifically targets those people who have already visited your website. It does this by serving them ads that are based on what they looked at while browsing your site.
For example, if someone viewed a product page but didn't make a purchase, they might see an ad for that exact product later on with a special promo or discount.
Track all of your data carefully to spot any trends and adjust your campaigns accordingly.
It's crucial that you keep a close on your data and analytics so you can see which campaigns, ad groups, and targeting options are working best for you. This information will help inform your future decisions about where to allocate your budget and how to tweak your strategies for better results.
Use ROAS To Your Advantage Today
Make sure to test out all of these tips to find what works best for your brand or eCommerce business! Tracking ROAS is crucial for ensuring you're getting the most return on your advertising investment. Keep these tips in mind and you'll be well on your way to increasing your ROAS and driving more sales through paid marketing channels.
Want more tips and guidance on using marketing automation technology to hit your targets? Portage Labs can help. Get in touch with us today!
Frequently Asked Questions (FAQs)
How is ad spend ROI calculated?
ROAS for a campaign is calculated by dividing (gross revenue) / (advertising costs).
What's a good ROAS?
There isn't necessarily a "good" ROAS since it will vary depending on your business and its goals. However, most companies aim for at least 400% or more return.
Can I use ROAS to measure other channels besides paid advertising?
ROAS can be used to measure any marketing strategy or activity that results in revenue, including but not limited to paid advertising, email marketing, social media marketing, and SEO.
How do I increase my ROAS?
There are many ways to increase your ROAS. Some of the most common methods include optimizing your website for conversions, using A/B testing to find what works best for your business, and utilizing dynamic retargeting.
How many keywords should I bid on?
Your Google Ads campaign is a work in progress, so remember to keep tracking ROAS and iterating on your Google Ads. There is no set number of keywords that you need to bid on. However, if your overall return falls below 100%, it's vital to reevaluate which terms are profitable so you can continue bidding only on the most effective ones.
What return rate do advertisers aim for when running an ad campaign?
Most companies have a target ROAS of 400% to make their advertising efforts worthwhile (ROAS=400%). This will vary depending upon the goals of each individual advertiser; some may be happy with lower returns while others might require a far greater target ROAS.
