In a world dominated by data and information, marketers and strategists are always analysing numbers. Only when a marketer has access to data can they develop the ideal approach – this is common knowledge. Data, on the other hand, is useless on its own.
While vast data sets are important, they are only useful if they are reviewed and evaluated to determine the effectiveness of a marketing strategy. The return on ad spend, or simply ROAS is one method of determining an ad campaign’s efficacy.
Return on Ad Spend (ROAS) is a key marketing metric that determines how effective an ad campaign is. It assists you in identifying your core capabilities, lead generation techniques, and conversion enhancement strategies, as well as the money earned by these conversions.
According to a report published by Statista, marketers in the United States earned roughly $11 for every dollar spent on digital search advertising, making digital search the medium with the highest return on investment in digital expenditures.
You may use ROAS to compare different marketing channels based on a variety of factors. The terms ROAS and ROI (return on investment) are interchangeable. In the case of ROAS, however, the returns are determined based on the amount of money spent on advertising. We’ve covered all you need to know about ROAS, including its definition, importance, and advantages.
What is ROAS?
Return on advertising spend (ROAS) is a measure that determines how much money you make for every dollar you spend on advertising. ROAS is a metric that determines how effective a marketing effort is.
For example, suppose your company spent $100 on the most recent ad campaign and you want to determine the campaign’s financial worth. Assume you made $250 in revenue from this campaign, which means your ROAS is 2.5, which is amazing!
You don’t have to track ROAS throughout the duration of the campaign. You may also track it at many levels, such as campaign level, account level, ad level, and so on.
The return on advertising spend (ROAS) is used to precisely measure the ad campaign, not the entire return on investment.
To gain a complete view of your outcomes, evaluate the bounce rate, click-through rate, and ROI in addition to ROAS.
Of course, every company and every advertising effort requires some type of measurement and analysis. Data is maybe the only tool that can provide clear, actionable insights into your marketing plans. It is critical to track performance – to understand and improve – and data is perhaps the only tool that can provide concrete, actionable insights into your marketing strategies.
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Importance of ROAS
ROAS is a key indicator that measures the quantitative performance of an ad campaign and analyses how it adds to the company’s revenue.
- The importance of ROAS is that it tells you which ad campaigns are profitable and which ones aren’t.
- It will also assist you in determining whether you should continue your efforts or restructure your spending to save money.
- You may also use it to review, compare, and quantify the value of ad campaigns across several media.
- When paired with additional metrics such as CPC, CPA, and CPL, a more holistic perspective of marketing efforts can be obtained.
How to Calculate ROAS
The money earned by ads divided by the cost of ads equals the return on ad spend. So, if you have precise data on how much you spent on advertising campaigns and how much money they brought in, you have a good chance of receiving nearly accurate results. Because all transactions and sales take place online, calculating for an eCommerce site is rather simple. You’ll be able to immediately see which campaigns resulted in conversions and which ones did not.
Why ROAS is above CPA
While both ROAS and CPA are used to determine the performance of an ad campaign, they measure various things such the amount spent, salaries, and commissions received. The return on ad spend (ROAS) is used to determine the profitability of your campaign, whereas the cost per acquisition (CPA) is used to determine the cost of a single conversion.
Consider situations A and B, in which the ad expenditure is $100, the number of conversions is one, and the cost per acquisition is $100. As a result, both ad groups A and B spent $100 each and only received one conversion, resulting in a CPA of $100 in both situations. In the case of ROAS, however, if campaign A earns $300 and campaign B only generates $100, a completely different image emerges.
The ROAS in A and B campaigns are 3.0 and 1.0, respectively, indicating a significant difference in return on investment compared to the amount invested.
When it comes to determining the profitability of your ad expenditure, ROAS is the way to go. CPA is also a good option if you want to optimize your marketing efforts to drive a specified volume. The lower your CPA, the better for your company. The higher the ROAS, on the other hand, the better your ad campaign is performing.
How to use conversion value to calculate ROAS
In Google Ads, you must add conversion metrics to each conversion activity in order to calculate ROAS. For each conversion action, you can begin by adding a basic flat value. You can also start tracking conversions by assigning a dynamic value to each individual transaction.
Other post-conversion data should be taken into account when calculating the ROAS. You must account for the time and money invested by your sales staff to convert a lead into a client, as well as the monetary value that the customer will provide to your company.
Let’s have a look at an illustration.
You executed a lead generation campaign and converted around 10% of the leads into paying clients. If each of these leads is worth $10,000, the final output will be worth $1,000. As a result, a $1000 CPA yields 1.0 ROAS, a $500 CPA yields 2.0 ROAS, and so on.
When you use a form fill to assign a flat value to lead generation actions, you may tell Google Ads to generate ROAS for all of your campaigns rather than working around your code.
How to optimize Google Ads account for ROAS
Before you start optimising your Google Ads account for ROAS, make sure it’s set up appropriately.
Select the specific ad campaign in your Google Ads account that you’re using a Target ROAS approach to improve. Under the ‘Settings’ category, select the ‘All settings’ option. On the ‘Bid Strategy’ tab, click ‘Edit.’ Select the ‘Target ROAS’ tab from the ‘Change Bid Strategy’ tab. You can enter the required ROAS bid as a percentage here and then click Save.
You can begin improving your Google AdWords account once the conversion values have been assigned. To begin your analysis, you’ll need a substantial amount of data. Then start segmenting the data into distinct groups or campaigns.
You’ll need at least 100 clicks for each campaign for evaluation purposes. However, like with any evaluation, the larger the dataset, the better.
You should also segregate the campaign based on the offers for the best evaluation. Every marketing should ideally separate services and products such that return and volume are balanced.
Marketers should be aware of the following:
- Conversion-generating search keywords
- Keywords with a low conversion rate yet a large spend
- Keywords or ad groups that do not convert but use a large amount of budget.
- Negative keywords that are detrimental to your business
Keywords having a clear sales intent, such as ‘sale’, ‘purchase’, ‘offer’, and shop,’ frequently have higher conversion rates. Shorter terms without a sales context may also have a larger search volume. The moral of the storey is that having more sales intent and context can be quite beneficial.
Instead of examining a high-spending generic campaign as a whole, it is always best to separate a lengthy campaign into smaller groupings that are distinct and obvious in terms of context. Since the major efforts have already been broken into smaller ones that yield better results, the plan would be to focus on the less efficient high-spend initiatives.
Furthermore, the goal should always be to concentrate on campaigns that generate revenue. It is recommended that you analyse the impressions shared across all of your efforts on a regular basis so that successful campaigns are not burdened by higher spending on ineffective marketing.
It would be beneficial if you attempted to strike a balance between these two scenarios and devised tactics to improve both campaigns.
Another thing to keep in mind is to continue optimizing your Google Ads account. You should assess your target audiences, their search history, purchase history, demographics, and more in addition to examining search queries and budgets. What are their search habits like? What kind of purchase habits do they have? When optimizing Google Ads for ROAS, keep these in mind.
Things to consider while calculating ROAS
The process of calculating ROAS is really straightforward and painless. It is calculated by comparing the revenue earned by the ad campaign to the cost of the drive.
Consider the following factors when determining ROAS:
- Salary Costs – the total amount spent, as well as the salary of advertising people (both internal and external) that participated to that specific ad campaign.
- Vendor Costs – the amount spent on the ad’s commissions and vendor fees.
- The sum given to networks and affiliates as an affiliate commission.
- The amount spent on paid impressions is referred to as “purchased impressions.”
When evaluating the return on ad expenditure for your company, you must keep three important factors in mind. You might not be able to reach the right numbers without these inputs. These values also assist you in re-strategizing, realigning your resources, and determining the performance of each ad campaign depending on a variety of metrics.
Tracking and measuring return on ad spends can present a number of obstacles as well as possibilities to overcome them. Each campaign has a distinct goal, but the ultimate goal of any campaign is to increase sales and corporate growth.