Is your campaign budget being put to good use? The quickest way to find out is through the campaign’s ROAS (Return on Ad Spend). This is one of the most powerful and important metrics for any advertiser; however, this doesn’t mean that you can rely solely on the ROAS to measure success in your campaigns. Interpreting this number based on the context of your campaign is essential to ensure you’re not accidentally derailing your advertising efforts. A deeper understanding of ROAS drives results, and by the end of this article, you’ll be fully equipped to apply your knowledge of ROAS to meet your advertising goals.
What is ROAS in Digital Marketing?
ROAS is a performance indicator that’s usually looked at to assess the success of advertising efforts. In any context, ROAS sets out the revenue generated for every dollar spent on a campaign. This metric can be used for short-term marketing efforts like a Black Friday sale or longer-term for a comprehensive series of campaigns. Return on Advertising Spend can be applied across various industries as long as you can confidently associate profits with spending.
CPA, ROI & ROAS: How Are They Different?
Although both are necessary and highly related metrics for digital marketing, CPA and ROAS represent very different things. Exploring CPA and ROAS begins by identifying total spending; following that, the two metrics diverge.
The ROAS marketing meaning is the KPI associated with profitability, allowing you to uncover the returns of your investment in an advertising campaign. Meanwhile, Cost Per Action (CPA) measures the outcome of ad spending, but its outcome isn’t necessarily related to profit. Finally, ROI is closely related to ROAS in the sense that it also evaluates returns. However, here, there’s no clarification in terms of where that investment went.
How to Calculate ROAS
Knowing how to calculate this metric is essential not only to generate the numbers but also to interpret the ROAS outcome. So, let’s start with the most basic question: how is ROAS calculated? To deepen your understanding of the topic, we’ll share a few examples. Once you have a full understanding of ROAS, you’ll be ready to tackle the metrics tracking tools that can perform these calculations for you. We’ll even tell you about our favorites!
The Return on Ad Spend Formula
To calculate for ROAS, follow this formula:
ROAS = Total revenue from x / Total ad spend for x Where: X is the scope of the advertising efforts
This will provide ROAS. If the calculation is a positive number, that indicates your campaign is generating revenue. Meanwhile, a negative number means that you’re losing money by running the campaign. However, we’d like to reiterate that this is the simplest interpretation of the calculation, and you should use it as a starting point instead of the sole decision point to guide your advertising efforts.
ROAS Calculation Formula Marketing Examples
Now that we have the formula, let’s start plugging some numbers into it.There are three possible outcomes when calculating ROAS, meaning there are three separate designations. To help you recognize them, let us share these examples with you:
- Profit: If the revenue is $15,000 and the ad spend is $10,000, the ROAS is $1.50.
- Break-even: Breaking even means you are covering your costs but not making a profit. An example is $10,000 for both ad spend and revenue, making the ROAS $1.00.
- Loss: With a $10,000 revenue and $15,000 ad spend, the ROAS is $0.50.
ROAS Metrics Tracking: What Tools Can You Use?
Since you can gather a lot of data automatically, this metric can be calculated easily. However, as we have mentioned, you don’t have to do any of the calculations on your own. You can use practically any advertising tool that can perform analytics, such as:
- Google Ads;
- Meta Ads Manager;
- Ads manager in e-commerce platforms like Shopify.
So, you can evaluate ROAS without using specialized software. Just use the tools that you’re already using. Then, all you need to do is to interpret the ROAS calculations based on the prevailing circumstances. Assuming the software captures all the relevant data, the output should be reliable.
ROAS Meaning in Numbers: What is Considered a Success?
We have emphasized how this key metric is designed to measure the success you achieve through your advertising efforts. So, at what point does ROAS indicate success? The answer is not as simple as it appears. In the following subsections, we’ll cover 3 potential factors that may be influencing the ROAS of your campaign. We’ll cover the most basic factors, so we encourage you to explore further based on your individual circumstances.
Goals of the Advertising Campaign
Not all advertising efforts are designed to have immediate monetary yield. For example, driving traffic to your website may result in $0 ROAS. Meaning, the campaign does not generate any money at all. However, if your goal is to increase site visitor numbers, does $0 really indicate a failure? The ROAS can change based on why you’re investing in advertising. Of course, if you’re going to target the bottom of the funnel, the expectations are different. In that case, the ROAS for the same number would be considered a loss, since the goal is to generate money from a certain product or service.
Baseline Ad Performance
If your brand awareness is still not at the level that you want it to be, assigning the same ROAS target as a more established brand may not work. So, assuming that you’ve run the campaign at least once before, it’s best to use those results as a benchmark for your outcomes. In this case, your interpretation of the calculated ROAS is individualized to reflect the specific circumstances of your business. Let’s say that the previous ROAS was $1.05. From there, it increased to $1.15. The latter might not seem that impressive when compared with a competitor. However, the difference between $1.05 and $1.15 represents a 9.5% increase!
Average ROAS for a Specific Product Type
There’s still merit in finding the average ROAS rate for your industry. For example, if you’re selling affordable ready-to-wear items, it will be easier to get sales than if you sell a high-ticket item. The ROAS of these two items may not be comparable because the considerations for purchase are too different. If you want to evaluate your level of success, try to find a very similar product and compare the ROAS.
Factors That Impact Marketing ROAS
Most of the time, your goal will be to get this metric as high as possible. However, you may not be able to accomplish this reliably if you don’t understand the factors that can cause it to fluctuate. Now, we want to establish that every factor has an effect not only on the potential ROAS but also on the other elements to be discussed here. So, our suggestion? Find the right balance to achieve the highest profitability while maintaining an optimal ROAS, meaning the revenue earned for every dollar spent on advertising. This will ensure your campaigns are cost-effective and sustainable for long-term growth.
Target Audience Quality
Someone who truly understands the factors that impact the success of your advertising campaign will ensure the target audience for the ad campaign will be the people most likely to take action. This can involve:
- Determining the unique characteristics (demographics, psychographics, etc.) to refine targeting;
- Using lookalike audiences to reach potentially interested users;
- Retargeting those who are not converted the first time around.
What will be your campaign’s ROAS if you are targeting the right audience? All else being equal, we expect it to be high because you’re not wasting money on low-quality leads.
Ad Creative and Copy
Unfortunately, knowing who your audience is may not be enough to yield results on its own. The visual appeal and appropriateness of the messaging can have an effect, as well. Therefore, your ad creative and copy must be on point and must be compelling enough to drive action. Considering your ad creatives not only impacts your ROAS but also boosts clickthrough and conversion rates.
Page Loading Speed
When talking about ROAS, many tend to focus on the elements that are determined by marketing expertise. However, website performance like the page loading speed can also determine whether someone will purchase a product or service. Page loading speeds reflect the reliability of the brand or product. Plus, not even the most interested buyer will wait forever for your content to load, especially if alternatives are available.
Optimizing ROAS: Ads and Strategies
Now that we know about the factors that can affect the effectiveness of your campaign, let’s talk about the strategy. Here, it’s important to go beyond ROAS and take a closer look at the things that can affect the returns. We’ve found it best to use your knowledge of the factors affecting returns as a starting point. Examining ROAS as a whole can be overwhelming, but focusing on smaller aspects of it will make the task more manageable. Feel free to incorporate any or all of these considerations into your strategy as you see fit.
Segment Your Audience
In the previous section, we touched on the need to have an audience that’s a good match for your offer. However, for your strategy, you need to go beyond that. There can still be a lot of diversity within your target audience. By segmenting them based on relevant characteristics, you’ll be able to deliver more impactful messaging that will more likely drive them to buy your product or service. Now that you’re developing a better grasp of ROAS, you’ll know that poor targeting can make even the best copy ineffective. So, take your time deciding how you want to approach this!
Split Test Your Ad Content
Marketers who are familiar with ROAS ensure that constant optimization is part of the strategy. So, test and test and test until you find the best combination of copy and creative design for your campaign. If you want to take it to the next level, you’ll be glad to know that you can perform split testing beyond ad content. In fact, why not use different ad types as well? Videos can turn out to be more effective than just an image and copy. It is crucial that you revise the techniques that can be applied. If you think that a certain element of the ad could have an impact on the revenue, feel free to test versions of that as well.
Make Sure That the Landing Page Works Well
Unless you’re using an e-commerce platform, the actual purchase will most likely happen on your website. Although it’s not directly touched, how well your landing page functions or displays information does have a huge impact on conversion rates. For example, if the page itself looks unprofessional or out-of-brand, the user may think that it’s a scam! Or if it takes too long for the page to load after clicking an ad, they may not pursue the transaction at all. So, from the moment they land on your website until they buy, users should experience a smooth-running site.
Turning Understanding of ROAS into Action: How to Use It to Optimize Your Ad Campaigns
ROAS is highly effective in advertising campaigns. (Take note: we’re talking specifically about the campaign!) By understanding how far your efforts are getting you, you’ll be able to make data-driven decisions to push the envelope even further. Before anything, make sure that you completely understand the ROAS meaning. Only then will you be able to fully leverage it for your advertising efforts.
Set Targets for ROAS
The way you set the target depends on you. Here are a few approaches that you can take, most of which require more than an understanding of ROAS:
- Look at what competitors can achieve;
- Determine the profit that you want to get from the ad campaign;
- Set a minimum acceptable ROAS to keep the campaign running.
However, we must warn you to set realistic goals. That way, you won’t end up spending too much time optimizing a campaign that’s already working well.
Evaluate the ROAS Across Different Campaigns
Let’s say that the ROAS for Campaign 1 is $2.00, while for Campaign 2, it’s $2.20. With what you know about ROAS, you know that the latter can generate more revenue. Based on this information, you can take a closer look at Campaign 1. Is there something that you can optimize to close the existing performance gap? Now, we’re not saying that this is the only course of action that you can take. If these hypothetical campaigns involve different products, then it’s possible that one is simply easier to sell than the other. However, if you don’t fully understand ROAS and its impacts, you may not be able to maximize the potential of every dollar you spend.
Adjust the Budget Based on the ROAS
The ROAS can reveal how well the campaign is running. So, it only makes sense to focus your resources on campaigns with the highest ROAS. This means reallocating the budget to put more into the campaigns that are generating better returns. This way, you can increase what you get out of your budget without spending more. With platforms that support real-time bidding, you can automate even this process.
Common Mistakes to Avoid When Evaluating the ROAS Metric
For many, ROAS is a very simple metric that provides a picture of how well a campaign is doing. However, not everyone agrees about the true impact of ROAS in the field of marketing. Some believe that there are too many external factors at play for this metric to accurately depict the health of your campaign. And they’d be right! The ROAS metric should never be taken on its own. So, avoid these mistakes to ensure that you’re not misinterpreting the information available to you.
Assuming ROAS Tells You the Profitability
Now, let’s go back to the ROAS meaning. R here means revenue. To calculate the profit, you still have to subtract:
- The ad spending;
- The cost of producing/delivering the product/service;
- Any human labor costs involved.
Anything else that is spent before delivering the product will cut into the profitability. Remember, the ROAS only provides a picture of what you get back based on ad spending. It’s entirely possible to have a high ROAS while the business is still losing money.
Placing Too Much Value on This Metric
You’re probably thinking, what’s the point of knowing about ROAS if it’s not even that important? While it is necessary in most cases, sometimes, having knowledge of ROAS will not affect the direction of your campaign. Let’s say, for example, the goal of your advertising campaign is to boost brand awareness. As necessary as that may be for an overall strategy, it doesn’t pay in the short term. In this case, instead of dwelling on the ROAS, focus on other more relevant aspects, such as engagement rates. It will not be a good fit for every situation, and that’s okay!
Using ROAS Exclusively as a Measure of Success and a Basis for Strategy-Making
Unfortunately, even people who have a decent technical understanding of ROAS can fixate on this number. It’s important to remember that this is only a part of the picture. You should use your understanding of ROAS to identify where it falls short. Earlier, we established that this metric doesn’t tell you how profitable a business actually is. As a marketer, look at advertising-related metrics that get you closer to determining this information. For example, why not look at the customer’s lifetime value as well? This is something that you can use for your strategy, allowing you to target high-value repeat customers to further increase potential returns.
Measuring and Understanding ROAS Across Different Advertising Channels
Various advertising channels have their unique ways of formatting and measuring ROAS. And while the ROAS meaning doesn’t change regardless of the platform you use, the way you interpret the number may differ. For example, Amazon ads are exposed to users who are actively searching for a specific product, so the ROAS should be higher. Meanwhile, for Google Ads, we recommend assessing different ad formats separately since their performance is rarely the same. As for Meta Ads, you may initially see a low ROAS if you have a cold audience. However, retargeted ads normally do better, so your expectations should be adjusted accordingly.
Challenges with Measuring ROAS in Marketing
As you can see, the actual measurement of ROAS is rarely a problem. Because modern platforms already support real-time updates and analyses, you’ll notice right away whether your efforts have impacted the success of your campaign. However, just because platforms are technically working smoothly, it doesn’t mean that there aren’t issues. To better contextualize ROAS and the number that you get from using various advertising channels, learn about the things that challenge the accuracy of this metric as a basis for decision-making.
Attributing the Revenue
Let’s say that the buyer first saw the ad on Facebook. However, only after looking up the brand and clicking the paid search ads did they end up buying. We know from the ROAS meaning that you’re measuring revenue. But where exactly should you attribute this? Even though the paid search ultimately closed the deal, seeing it for the first time on a Facebook ad contributed to the purchase. Fortunately, there are already workarounds for this, so you don’t have to deviate much from the ROAS meaning when deciding where to attribute the sale. With multi-touch attribution, both can now be credited so that the sale partially contributes to the two campaigns.
Privacy Policies
Interest in ROAS skyrocketed because of digital marketing, as it became easier to identify which action contributed to a certain outcome. However, with data privacy laws like the GDPR and CCPA introducing restrictions on what information you can track, the accuracy of ROAS may be diminished. Right now, there’s a need to replace the third-party data that businesses used to be able to collect freely. That’s why first-party data and server-side tracking are gaining traction. With these viable alternatives, the ROAS metric maintains relevance for marketers who want to become better at running campaigns.
Long Purchase Cycles
In certain industries, it is normal for deals to take a while to close. This can be due to many factors, like the decision-making process within the purchasing organization or the price of the product. In such cases, you may see a lower ROAS. Meaning, the apparent effectiveness of the campaign is dismal. However, the ROAS may increase significantly when a client makes a purchase. With a longer sales cycle, it can be hard to determine whether the metric is truly measuring the performance or just signifying the readiness to buy. To help address this and stay true to the ROAS meaning, we suggest delayed conversion tracking. This way, you can consider the sales from, let’s say, the last 90 to 180 days instead of just from last week.
What’s ROAS? The Ultimate Basis of Ad Revenue Generation Capabilities
In the end, advertisers put in the work to improve how much a product or service brings to the business. So, the ROAS definition in marketing is just one part of the equation. Your next step is to boost it! To provide contextually relevant ads that your audience is more likely to respond to, incorporate native advertising into your campaign efforts. With MGID’s deep understanding of the ROAS metric, top-notch resources and personal managers, you get everything you need to improve profitability with an MGID signup. What does ROAS mean in marketing? It empowers you to optimize your campaigns for the greatest possible returns. Let us help you make that happen!
