Spending significant funds on advertising means one thing for you: You want to see great returns.
This, in a nutshell, is called seeking good RoAS or “return on ad spend.” If a company has good RoAS, they’re spending wisely when it comes to their advertising. In turn, they should be earning more and propelling their business forward at a faster rate.
Below, we’ll talk about how you can maximize your return on ad spend (because the answer is not always so simple).
Table of contents:
- What is return on ad spend (RoAS)?
- How do I calculate RoAS?
- RoAS vs. CPA: Which should I use?
- How does RoAS differ from ROI?
- What is a good RoAS?
- How can I improve RoAS?
What is return on ad spend (RoAS)?
RoAS stands for return on ad spend. This is a marketing metric that pins dollars spent on advertising against dollars earned. Most companies calculate their RoAS for a specific ad campaign so that they can analyze the effectiveness of that campaign.
RoAS is measured in percentages. So, if you have a good RoAS, you have a high percentage — for example, 200% or 400%. Respectively, these would be a 2:1 return (200% RoAS) and a 4:1 return (400% RoAS).
Calculating RoAS is an excellent way to see how successful your advertising efforts are from various angles. It can also help you see where small changes have changed the overall outcome of your advertising strategies. You might work out an RoAS calculation for a particular campaign, a specific account, or a unique ad group. You can also make the calculations based on a targeted geographic location or season.
How do I calculate RoAS?
In order to calculate a return on ad spend, you’ll want to divide your “revenue from ads” by the “cost of your ads.” Having the resulting RoAS percentage will give you detailed information about the unique strategies you’re using.
Still not sure how to calculate RoAS? Let’s take a look at an example:
Say you run an ad campaign that costs you $10,000. The campaign does fairly well, but not outstanding, and earns you a total ad revenue of $15,000. In this case, you would take $15,000 and divide it by $10,000. This will give you your return on ad spend, which would be 1.5. Turn this into a percentage (multiply it by 100%), and you have a 150% RoAS for this ad campaign.
RoAS vs. CPA: Which should I use?
When it comes to calculating RoAS, you’ll likely hear a lot of people saying that this metric is either the same as CPA or interchangeable with CPA.
In fact, while CPA (cost per action or cost per acquisition) is indeed a similar metric as RoAS, the two are quite different. In terms of likenesses, both RoAS and CPA are KPIs (key performance indicators) that measure how well your business spending is going. However, CPA is measuring the overall cost of a given individual becoming a “conversion” (a paying customer) while RoAS is looking at the overall net benefit of an ad campaign (or similar metric).
To calculate your CPA rate, simply divide the amount of money you spend total (or on a given campaign) by the number of conversions you get. This will give you a number that represents how much it costs your company, on average, to acquire a new customer, which is also known as a conversion.
How does RoAS differ from ROI?
You’ll certainly hear CPA thrown around a lot when it comes to RoAS, and you will also hear a lot about ROI, which stands for return on investment. Again, ROI is a similar metric to RoAS, but they are not exactly the same.
Basically, a given ROI represents the value of any investment. While RoAS represents the overall value of an advertising investment, in particular, an ROI can represent any type of investment — even something like real estate or a new product or service. To calculate an ROI, subtract the costs of your investment from your overall revenue, then divide that number by the total investment costs.
Let’s take a look at a marketing campaign example since we’re talking about advertising:
Say you were to spend $15,000 on a paid search advertising campaign and also had $5,000 in additional operating costs. Your investment (overall costs) would be $20,000. Let’s say you made $30,000 from this investment. You would then subtract your costs from your total revenue ($30,000 - $20,000 = $10,000). Then, you would take that number ($10,000) and divide it by your costs ($20,000). From there, you would also want to make the sum into a percentage by multiplying the number by 100%. This would leave you with an ROI of 50%.
What is a good RoAS?
While it may be tempting to say you shouldn’t settle for anything less than X for your RoAS, this actually isn’t realistic. Companies measure their RoAS based on a range of criteria. As a result, what appears to be only a mediocre RoAS for one company’s ad campaign may be phenomenal for another company. It all depends on the industry, geographic location, whether you’re just breaking into a new market, and a number of other factors.
At the same time, we can of course offer a rough estimate of what is usually considered to be a “good” RoAS: Most of the time, if you have a 400% (4:1) or higher RoAS, you’re doing pretty good. It’s important to establish ROAS goals that are appropriate for your business. This means your ROAS numbers can vary.
How can I improve RoAS?
Once you know how to calculate your return on ad spend, it's time to analyze how successful you've been with your marketing and advertising endeavors. If you find that you could be doing better, rest assured there are many ways to improve your return on ad spend:
Know Your Budget
While a faulty strategy is often to blame for a poor RoAS, sometimes the culprit is actually overspending.
Take a look at your paid search budget. Generally, successful businesses spend between 7 and 12 percent of their annual gross revenue on advertising and marketing. If you’re on the high end of that range, you may be overspending, which is making your RoAS look worse than it actually is.
While we certainly support spending an adequate amount on marketing as it is an investment that will ultimately be returned and then some, it makes no sense to spend recklessly.
Analyze Your Paid Marketing Channels
Take a look at which paid marketing channels you’re currently using. In fact, some companies will calculate RoAS based on each paid marketing channel, which can be highly effective when deciding what to keep and what to toss.
Most companies have any combination of the following:
- Print advertising (direct mail / printed ads)
- Displays (brick-and-mortar indoors and outdoors)
- Marketing at events
- Affiliate marketing
- PPC (pay-per-click)
- Social media advertising
- SEO (search engine optimization)
Depending on what you use, evaluate what’s working best and what’s not working well or at all. Keep in mind that just because one strategy was holding its own last year doesn’t mean it will support equal revenue this year.
Optimize for Mobile
Despite the fact that you probably view your e-commerce site and social media sites on a desktop most of the time, most people are using your sites on mobile devices — if not on mobile phones, then on tablets. One funky webpage load or a difficult-to-navigate page and your potential conversions are gone.
In other words, it’s essential to optimize every one of your webpages and social media accounts for mobile viewing. While this tip doesn’t necessarily involve moving money around your ad campaigns or adding or dropping marketing channels, it’s one of the most important things to talk to your web design team about. Having a seamless website that works well on all devices will naturally boost your RoAS.
Watch Your Competitors
There are a number of reasons why a specific marketing channel or ad campaign may not be working — but often the issue is a lack of awareness about what other companies are doing. For example, think of all the months that passed before the majority of companies understood the importance of influencers and word-of-mouth reviews. These are golden opportunities to sell products and services (for now anyway), but many businesses didn’t understand their impact until the market had already been saturated.
Of course, you can’t always have your finger on the pulse of your customers. But one way to keep in touch with what’s hot and what’s not is to watch what your competitors do.
Adjust Bids Based on Device
Take a look at your bids and decide where you can make adjustments.
Bid adjustments can be made based on various criteria, one of which is the device being used. For example, if you have an ad campaign that always does well with mobile users, you may want to remove the campaign for searches made on desktop computers or laptops.
Adjust Bids Based on Time and Location
Just as making bid adjustments based on device is important, it’s also crucial to make adjustments based on time and location. For example, let’s say you own a diner that’s only open from 6 a.m. to noon. Targeting the keywords “breakfast diner near me” after 12 p.m. doesn’t make much sense.
The same principle goes for location. If you sell wine online from your California vineyard, but regulations prohibit you from shipping alcohol to certain states, it doesn’t make sense to target those locations in your ad campaigns. Conversely, if you only sell products from a brick-and-mortar location (let’s say you own a single grocery store in Storeyville), you’ll only want to target Storeyville and perhaps a bit of the surrounding area when it comes to online advertising and your bids.
Setup Proper Tracking in Google Analytics
Google Analytics is a free tool to help companies measure the success of their ad campaigns. In particular, you can use Google Analytics to make the necessary measurements for calculating RoAS.
While many companies use this tool, it takes a bit more elbow grease to set it up properly and achieve optimal tracking. Once you have the proper tracking settings, you’ll be able to calculate:
- Where your traffic is coming from
- The demographic of your visitors
- Whether your traffic is coming from desktop computers or mobile devices
- How much traffic each page is generating
- How many leads are being converted
Remember to make sure that you have your eCommerce tracking setup and working properly in Google Analytics to ensure you're able to even track ROAS.
Pay Attention to Marketing Attribution
Marketing attribution can be defined as the way in which a customer was “converted” (began paying you for your goods or services). The principle derives from the idea that individuals rarely go straight to a website to make a purchase without hitting up several “touchpoints” along the way. In other words, the path to purchase is usually fairly meandering.
This is important for advertisers to understand, of course. In an ideal world, we’d actually be able to peer into the minds of customers and see their emotions and thoughts change as they click one of your ads, see your website for the first time, fill their cart, research your products in separate tabs, look for promotion codes, etc.
Because we can’t do this, however, we’re forced to simply break the process down by criteria and create models to help us better understand the process. For example, the “first-touch attribution” model looks at which “first-touch” touchpoints lead to the most conversions — is it ads on Facebook, influencers on Instagram, emails, text messages?
There are a number of marketing attribution models that are great at helping you tweak ad campaigns and increase conversions.
Finetune and Tweak Over Time
When it comes to advertising, no matter how convenient it would be to “set it and forget it,” that’s simply not possible. In fact, the strategies you use can (and should!) change over time, and it’s up to you and your marketing team to stay on top of those changes and tweak them as you go. This all starts with knowing your RoAS.