Suppose you are looking for a way to quickly assess which of your ads are working best and whether they are generating revenue or losing money. In that case, ROAS might be for you.
Read on to find out how to use ROAS, and the formula used to calculate it.
What is ROAS
Return on advertising spend (ROAS) is a metric used to measure how much revenue your ads bring in for every pound spent on advertising. You can use ROAS to tell you if your ads are generating revenue.
The formula for ROAS is pretty simple. You divide your revenue generated from ads by the cost of the ads. Let’s take a look at an example.
Assume your revenue from advertising was £35,000, and you spent £12,000 on the ads.
£35,000 / £12,000 = £2.92
This result means that for every pound you spend on advertising, you generate £2.92 in revenue. Not bad!
ROAS vs ROI
ROAS measures the amount of revenue generated, while ROI measures the return on investment based on profit. ROAS also explicitly focuses on the amount spent on ads. In contrast, ROI is factoring in other costs associated with running a marketing campaign.
Ultimately, this all means that ROAS is good at letting you know if your ads are working well at driving revenue. ROI will tell you if your marketing campaigns are making a profit for your business.
Let’s take a look at an example. We will use the same figures in the previous example.
For ROAS, previously we had the following:
£35,000 / £12,000 = £2.92
For ROI, we need to consider costs. In this case, the ad creatives cost £5,000 to produce, and you also hired a PPC agency to set up and manage the ads, which cost £7,000. With your ad spend, your cost of investment is now £24,000. We also need to consider the manufacturing costs of the items sold were £12,000, leaving £23,000 gross profit. How does this affect our ROI?
Well, ROI is ((Gross profit – Marketing spend) / Marketing spend) x 100
So in this example, ROI = ((£23,000 – £24,000) / £24,000) x 100 = -4.17%
Uh oh. This negative figure means that this business lost money on this advertising campaign—quite a different result from what we saw with ROAS.
What is a good ROAS
I do not feel as though there is a single number that would be a good ROAS. Instead, it depends upon your industry and business-specific factors such as profit margins. To identify a good return on ad spend, you will need to look at it in tandem with ROI. A ROAS value that allows you to hit your profit targets is a good result.
How to improve your ROAS
There are two components of ROAS – your revenue and how much you spend on adverts. Therefore, to improve your ROAS, you need to increase revenue and/or reduce advertising costs.
To increase revenue, you need to look at the UX of your landing pages and carry out some CRO on them. The more you can increase your landing page conversion rates, the greater the revenue you are achieving for the same amount of spend.
Consider your choice of keyword, negative keywords, and your ad creative to reduce the cost of advertising. You want to focus on keywords with high transactional search intent. Negative keywords can help you filter out people who are not explicitly looking for your services and unlikely to convert. It would be best if you also looked at your ad creative. Ensure that it is reflective of your services to avoid people clicking on your ads, only to find out it is not suitable for them. For example, suppose you sell a premium product that is relatively expensive to similar products. In that case, you do not want your ads to suggest that your products are cheap. Otherwise, you will have many people clicking on your ads looking for a bargain, only to find a product outside of their budget.
Now you have a better understanding of ROAS, go and use this metric for your PPC campaigns.