What is ROAS (Return on Ad Spend)? Explained in Detail

Return on Ad Spend (ROAS) is a crucial metric used to measure advertising campaigns' effectiveness. Several studies show that businesses can earn an £2 on average for every £1 spent on digital ads, with a typical good ROAS ranging from 400% to 500%. Thus, it's essential to understand how to calculate, optimise, and interpret ROAS to boost your marketing efficiency significantly.  

In this blog, we’ll explore What is ROAS, why it truly matters, how to improve it, its benefits and drawbacks, and the difference between ROAS and ROI. 

Table of Contents 

1) What is ROAS? 

2) Why  Return on Ad Spend (ROAS) is Important 

3) How to Calculate and Interpret ROAS? 

4) Ways to Improve your ROAS  

5) Benefits of Using ROAS  

6) Drawbacks of Using ROAS  

7) Differences Between ROAS and ROI 

8) What is Considered a Good ROAS? 

9) Conclusion 

Understanding What is ROAS 

Return on ad spend (ROAS) is a crucial KPI in online and mobile marketing. It measures the revenue earned for every pound spent on a campaign, reflecting the profit made for each advertising expense. ROAS can be assessed on a broad scale or in more detail, such as at the campaign, targeting, or ad level. 

Whether you're evaluating an entire marketing strategy or focusing on specific aspects, ROAS is essential for gauging and determining the success of your mobile advertising efforts. 
 

Why Return on Ad Spend (ROAS) is Important? 

Understanding why Return on Ad Spend (ROAS) matters is crucial for optimising your marketing efforts. Here are some key points to consider:
 

1) Performance Evaluation: ROAS is essential for quantitatively evaluating ad campaigns' performance and understanding their contribution to an online store's bottom line. 

2) Informed Decision-Making: Combined with customer lifetime value, insights from ROAS across all campaigns help inform future budgets, strategy, and overall marketing direction. 

3) Efficient Investment: By closely monitoring ROAS, ecommerce companies can make well informed decisions on where to invest their ad pounds and how to become more efficient in their marketing efforts. 

How to Calculate and Interpret ROAS? 

The fundamental formula for calculating return on ad spend (ROAS) is: 

For example, if you are spending £1000 on an ad campaign and it generated £3000 in revenue, your ROAS would be £3. This means you earned £3 for every £1 spent. 

You can express ROAS in different ways. The most common is a ratio, like 3:1 (£3 revenue for every £1 spent). Alternatively, you can express it as a percentage by multiplying the result by 100, which would be 300% in this example. 

When calculating ROAS, determining the cost of ads can be a bit more complex. You need to decide whether to track just the pounds amount spent on a specific platform or include additional advertising costs, such as: 

1) Vendor Costs: Fees paid to vendors for running the ad campaign. 

2) Team Costs: Salaries or fees for the person managing the campaigns, whether in-house or through an agency. 

How you define the 'cost of ads' will depend on the campaign type you're running. Sometimes, it's best to use the exact ad costs and create a separate ROAS that includes all related expenses. This approach gives you a clear view of each campaign's overall performance and profitability, where ROAS is a key performance indicator. 

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Ways to Improve your ROAS  

There are several ways to improve your ROAS. Some of these methods include:  

1) Establish Clear Benchmarks  

To determine your target ROAS, you first need to understand what qualifies as a good ROAS and set that as your benchmark. Knowing each campaign benchmark and channel can help you identify where you've been successful and serve as a model for future campaigns. This way, you can optimise your strategies and allocate your budget in a better way. 

2) Reduce Ad Costs 

To maximise your return on ad spend, consider reducing costs by improving your quality score, which results in higher-ranking ads and lower cost per click (CPC). Focus on long-tail keywords or those specific to your niche instead of the most popular terms. Additionally, use negative keywords to exclude users searching for similar but not exact items, enhancing your click-through rate (CTR) and ensuring effective budget use. For example, if your shopping app has a winter deal for scarves, exclude users searching for winter gloves to avoid irrelevant clicks that don't yield returns.   

3) Improve Your Landing Pages   

If your ads get plenty of clicks but your ROAS remains low, it's time to examine where the ads direct users. Is your landing page clear and engaging? Does it align with the look and feel of the ad? Does the page load quickly? Are the calls to action clear? You can make many adjustments to ensure users move smoothly through the purchasing journey. 

4) Understand Your Target Audience  

Conduct thorough customer research to understand where are your ideal customers are, when they are online, and what interests them For instance, if you know your target audience is parents who follow food content on Facebook, they might be interested in your family recipe app. 

By aligning your message with your audience's interests, you'll drive higher conversions and avoid wasting money on ineffective channels. 

5) Retarget High-Value Customers for Increased Revenue  

Re-engagement is often more cost-effective than user acquisition (UA) and can even be free if you use your own channels. If you have several number of users who have delivered a high ROAS, it's crucial to re-engage and encourage them to repurchase. 

One effective strategy is offering a limited-time deal. This not only makes users feel like they're getting a great deal but also shows them that they are appreciated and valued. 

6) Take a Holistic View of Your Marketing Efforts  

If customers abandon their carts before checkout, it's essential to investigate the reasons. Is your price too high? Are you asking for too much information? Is the process confusing? Look beyond advertising to optimise the entire customer journey and ensure a smooth, user-friendly experience. 

7) Implement Smarter Bidding Strategies 

Experimenting with different bidding strategies can help you find the most cost-effective approach. You might save money by adjusting your maximum bidding price, using automated bidding, or setting different bids for desktop and mobile. This way, you can optimise your ad spend and improve your overall return on investment.   

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Benefits of Using ROAS  

Staying on top of your ROAS can significantly benefit your marketing campaigns. Here are some ways it can help: 

1) Measures ROAS Across All Your Channels: By measuring ROAS across all your channels, such as email, social media, and out-of-home, you can identify which ones give you the most value. This allows you to focus on the most effective channels and eliminate those that drain your budget with little return. 

2) Optimise Your Ads: Comparing ROAS across different ad creatives helps you identify which words and images resonate most with your audience. You can then tailor your ads to give them more of what they like. 

3) Make Reporting Easy: ROAS is simple to understand and explain, even to non-marketers. It provides a quick snapshot of your ad performance, showing how much revenue your ads generate. 

4) Eliminates Guesswork: Understanding what works and what doesn’t allows you to shape future marketing strategies and campaigns more effectively. This saves money, brings results faster, and makes it easier to justify your management ideas with data-backed insights. 

Drawbacks of Using ROAS 

No single metric is a silver bullet; even a powerful one like ROAS (Return on Ad Spend) has limitations. Here are a few to keep in mind: 

Short-Term Focus: While you can set the timescale for measuring ROAS, it often focuses on the short term. This is because it measures behaviour directly linked to a specific ad. To understand your revenue over the long term, you need to consider customer lifetime value (LTV). 

Lack of Context: Ads don't operate in isolation. A Facebook ad might get the final click, but that could be due to prior exposure to a poster, a review, or a friend's recommendation. Advertising is just one of the components of the marketing mix, making it challenging to attribute returns solely to one ad spend. 

Volume Blindness: A positive ROAS can be achieved with a small customer base, perhaps from a very cost-effective campaign. However, this doesn't account for potential revenue if you had attracted more customers.  

Differences Between ROAS and ROI 

Understanding the difference between ROAS and ROI is important for evaluating the effectiveness of your marketing efforts. Here are the key distinctions: 

1) Definition: ROAS is Return on Ad Spend, while ROI stands for Return on Investment. ROAS measures the efficiency of online or mobile marketing campaigns by calculating the revenue earned from a campaign relative to the amount spent on that campaign.  

ROI, on the other hand, measures the return on a particular investment relative to its cost, using the formula: ROI = (Net profit / Net investment) x 100. 

2) Scope: ROI provides a broader perspective by considering the overall profitability of an investment, including all associated costs and returns.  

ROAS is more focused on assessing the direct financial return from advertising spent alone. 

3) Calculation: ROI involves calculating net profit and comparing it to the total investment, giving a percentage that indicates overall profitability.  

ROAS calculates the generated revenue from advertising relative to the ad spend, providing a ratio that shows the efficiency of the ad spend. 

What is Considered a Good ROAS? 

An acceptable ROAS (Return on Ad Spend) is influenced by numerous sets of factors such as profit margins, operating expenses, and the business's overall health. While there isn't a one-size-fits-all answer, a common benchmark is a 4:1 ratio—$4 in revenue for every $1 spent on advertising. Start-ups with limited cash flow may need higher margins, whereas online stores focused on growth can afford higher advertising costs.  

Some businesses need an ROAS of 10:1 to remain profitable, while others can thrive with a 3:1 ratio. To determine its ROAS goal, a business must have a clear budget and a solid understanding of its profit margins. A larger margin allows a business to sustain a lower ROAS, whereas smaller margins indicate the need to keep advertising costs low. In such cases, an e-commerce store must achieve a relatively high ROAS to achieve profitability. 

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Conclusion 

In conclusion, understanding and optimising ROAS is essential for improving the efficiency of your advertising efforts. By calculating, interpreting, and enhancing your ROAS, you can make better data-driven decisions that lead to optimal returns on your marketing investment. Implementing cost reduction and targeted retargeting strategies can significantly boost your campaign results. 

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