Have you ever heard the term “ROAS”?
Perhaps in the context of, “How is ROAS calculated?” or “What’s a good ROAS percentage?”
ROAS stands for return on advertising spend. It’s a marketing metric that digital advertisers use to look at the performance of an ad campaign. By calculating what is a good ROAS, businesses can see how effective their methods are—and see where they can improve for future advertising campaigns.
Knowing how to calculate your ROAS and measuring up to the right standards is key to understanding what changes need to be made to have a more effective ad.
Keep reading to learn the answers to questions like “what is a good ROAS?” and the others mentioned above!
Formula for ROAS
The formula is pretty simple; the total campaign revenue is divided by the total campaign cost.
Let’s say your company spends $500 on advertising in one month. By tracking the performance of this campaign, you can see that your company made $2000. So, your ROAS is a ratio of 4:1, which is found by dividing your total revenue by your spending.
Looking at this another, simpler way, we could say that for every dollar you spent, you made $4 in revenue.
But how will you know what is a good ROAS and what is a bad ROAS?
It depends on a multitude of factors:
Your industry/niche
Your profit margins
Your average cost-per-click (CPC)
The average marketer aims for a 4:1 ratio — $4 in revenue to $1 in ad costs. However, the average ROAS is actually 2:1.
Math aside, we need to understand why ROAS is important for your company if you’re going to undertake a digital ad campaign.
What is ROAS?
ROAS is only one metric that marketers look at.
It plays an important role in examining the value you’re getting from your spending. If you were purchasing online ad space, you would want to ensure it attracted customers and netted you some sales, right? Well, that’s what ROAS helps you determine with digital advertising.
Other areas include the overall return on investment (ROI, which looks at the big picture vs. only ad spending), click-through rate, link referrals, funnel conversion rates, customer lifetime value, brand awareness, and qualified leads.
However, we should mention that having a high return on ad spend doesn’t always mean your ad has been profitable. ROAS does, though, show the existing correlation between advertising efforts and revenue.
In addition to gauging how effective your advertisement was in terms of generating sales, ROAS can also be used to compare the cost-effectiveness of marketing campaigns during A/B testing.
For example, advertising campaign “A” may generate three times as large an increase in sales volume as advertising campaign “B” does. But if campaign “B” costs only one-half the price of campaign “A,” then “B” is a more cost-efficient advertising expenditure.
As you can see, knowing what is a good ROAS depends on many different factors.
ROI vs. ROAS
When you’re speaking with an agency or consultant about running paid acquisition campaigns, you may hear them use terms like “ROI” and “ROAS.”
While they both measure the profitability of a campaign, ROI takes into consideration the other costs associated with your campaign, such as designer fees, computer costs, software, etc. ROAS only takes into account the amount spent and the revenue.
Difference between ROI vs. ROAS:
ROI:
Measures how well a particular investment has performed
Entire project cost including advertising
ROI looks at profit
Determines if an ad campaign is making the entire business any money
ROAS:
Measures the overall return of a specific campaign
The only cost considered is advertising
ROAS looks at revenue
ROAS won't tell you if the particular ad was profitable for the company
To determine the ROI of your campaign, you subtract your marketing costs from your overall profit, divide that by your marketing costs, and multiply that entire number by 100.
For example, if your profit is $3,500 and your marketing costs were $1,500. In this instance, your marketing ROI would be 133%.
How to Improve Your ROAS
Now that we’ve explained what is ROAS (and what it is not), we can start to figure out how to improve yours!
Here are the top areas of improvement we suggest focusing on:
Lowering your cost per click
Improving your conversion rate
Increasing your revenue per conversion
Lowering Your Cost per Click
If you take the average CPCs across all different types of businesses and keywords in the US, the overall average CPC in Online Ads is between $1 and $2.
Keyword research is the first step in lowering your cost per click.
Since you’re competing with a multitude of competitors for the same keyword sometimes, doing research and figuring out which keywords and keyphrases have the least amount of competition is essential.
You can always choose your keywords based on cost alone, but the volume and intent behind those keywords are incredibly important too. Having a healthy mix of low-cost keywords and high-reward keywords will ensure that you get the lowest CPC possible without sacrificing conversion quality or quantity.
Another way to lower your CPC is to choose the right campaign objective. Facebook, for example, lets you choose objects from brand awareness to traffic to lead generation to conversions. While we want to improve all of these areas, your ad should focus on only one specific objective.
Your Facebook campaign objective determines how your ad will be served. Similar to Google’s automated bidding strategies, certain objectives may result in a higher CPC as they prioritize other actions.
Improving Your Conversion Rate
Your conversion rate is the percentage of people who convert after clicking on your ads. Depending on your objective, a conversion may mean they make a purchase, sign up for your email list, sign up for a free trial, etc.
Two of the biggest ways to improve your conversion rate would be to write a super engaging, click-worthy headline, and to optimize your landing page for conversions.
Without a show-stopping headline that makes your audience want to take action, they’ll just continue scrolling.
We recommend using power words and taking advantage of headline analyzer tools to make sure you’re creating the best headline possible.
Here are a few ad power words we suggest:
While it might seem simple to create a landing page, creating a high-converting landing page can sometimes feel like brain surgery.
Your landing page should be the middleman between someone going from a follower to a customer; it lets you make a trade for some sort of special discount, a piece of information, or a product, in return for providing their contact information.
To learn 8 Simple Tricks to Creating A High-Converting Landing Page, click here.
Increasing Your Revenue per Conversion
Increasing your revenue per conversion is the single best way to improve your ROAS!
Here are four ways to increase your revenue per conversion:
Highlight the benefits of additional products or services
Bundle your options
Use live chat to answer questions and recommend products or services
Key Takeaways
While there’s no magic number you should aim for, ROAS is generally considered “good” when you’re getting roughly that 4:1 ratio we mentioned above. If you’re not reaching that goal, it’s time to evaluate why your efforts aren’t paying off in the way you want, and how to improve certain aspects.
If you’re ready to start an ad campaign and are looking for a company to create your high-converting landing page, give Zoek a call! We have created over 100,000 websites for our customers and would be happy to create a landing page for your next ad campaign.
Kellyann Doyle is a Content Marketing Writer at Zoek, an SEO, Web Design, and Digital Marketing Agency that assists small and medium-sized businesses with their online footprint. She earned her Bachelor's Degree in 2013 from the University of Houston with a Major in Communications and a Minor in Marketing and has been working in the Digital Marketing world ever since. When not working, you can find Kellyann trying new recipes, enjoying a good nap, or watching Friends for the 500th time.