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Jan 9, 2024
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In this guide we'll explain what return on ad spend (commonly abbreviated as ROAS) is and why it is useful for a business to understand this metric. Here are some key takeaways about return on ad spend (ROAS):
Ultimately, an understanding of return on ad spend will help you to maximize the impact of your advertising efforts.
Advertising plays a crucial role in promoting businesses and reaching target audiences. However, it's not enough to simply invest in advertising; it's essential to understand the return on ad spend (ROAS) to assess the effectiveness and efficiency of your advertising campaigns.
ROAS is a metric that measures the revenue generated for every dollar spent on advertising. It provides valuable insights into how well your ads are performing and whether they are delivering a positive return on your investment. By understanding ROAS, you can make informed decisions about optimizing your advertising strategies and allocating budgets effectively.
When running paid advertising campaigns, the importance of understanding ROAS cannot be overstated. Here are a few reasons why it should be a top priority for businesses:
1. Maximizing Advertising Efficiency: ROAS helps you identify which advertising channels, campaigns, or keywords are driving the most revenue. By focusing your resources on the most successful strategies, you can maximize your advertising efficiency and generate higher returns.
2. Budget Optimization: Along the same lines as our previous point, with a clear understanding of ROAS, you can allocate your advertising budget more effectively. The previous point was a point of focus for marketing teams, but budget optimization is often a focus of finance teams. ROAS is a great way to bridge the objectives of a sales and marketing team (who often focus exclusively on driving revenue) and finance teams (which spend considerable time trying to cut costs).
3. Performance Benchmarking: ROAS serves as a benchmark for evaluating the success of your advertising efforts over time. Through this channel, you can compare the effectiveness of different advertising strategies with each other. It's also possible to compare different ad campaigns run through the same channel to one another.
4. ROI-driven Decision Making: ROAS provides valuable data to support ROI-driven decision making. By analyzing the correlation between ad spend and revenue generated, you can make data-backed decisions on scaling up successful campaigns, adjusting targeting strategies, or exploring new advertising opportunities.
To effectively measure return on ad spend, it's crucial to track and analyze key metrics such as conversions, revenue, and ad spend across the entire campaign. Implementing proper tracking mechanisms, setting clear goals, and regularly reviewing and optimizing your campaigns are essential steps in understanding and leveraging ROAS to drive the success of your advertising endeavors.
The return on ad spend formula that we will use is a ratio (example: 5:1) between the revenues earned from a particular advertising campaign and the costs of that advertising campaign.
Here is an infographic simply highlighting this formula:
Remember, the goal of tracking ROAS is to understand the ROI that an advertising campaign generates. This can be compared to other advertising efforts, or it can be used to decide between reinvesting in advertising, or operations (or somewhere else).
Next we'll look at some examples of what might be included in the total advertising costs of a particular campaign:
As an example, if a business spent $50,000 on an advertising campaign (platform fees, transaction fees, and salaries), and that company generated $150,000 in revenue from that campaign, we would see their return on ad spend (ROAS) was 3:1.
Now that we've learned what return on ad spend is, and understand both how to calculate it and why it's a valuable metric to track, we can look at how to improve our ROAS.
Ultimately we have two "levers to pull" that will help us to improve the ratio. In short, we can decrease our advertising costs, or we can increase the amount of revenue earned from a specific campaign.
In order to decrease our costs, we can't just stop spending money on ads. This would almost certainly work counter to what we're trying to achieve (a better return on ad spend). However, through measuring things like return on ad spend, customer acquisition cost (CAC), Customer Lifetime Value (LTV), we could learn some things that would help us to reduce our advertising costs. Some examples might be:
On the other side of the ratio, we would want to look at ways that we could increase the amount of money that these advertising campaigns generate:
These are a few ideas to help you get started working to improve your return on ad spend. Ultimately try some things, observe what works and what doesn't, then double down on what you've already gotten to work until you've maxed that out.
