The marketing world is filled with acronyms, and it can be hard to keep up with all the different definitions, especially when it comes to performance metrics. One acronym that you definitely need to know about is “ROAS.” ROAS can make or break your advertising campaign, so let’s talk about what it means, how to calculate it, and how to improve it.
Return on ad spend, or ROAS, is an important advertising performance metric that calculates the return earned on an advertising campaign. A good ROAS is an indication of an effective campaign, whereas a poor ROAS is an indication that changes should be made to get the campaign back on track.
ROI stands for “return on investment.” And while ROAS and ROI might seem like the same thing, there are actually key differences you should know about to properly manage your advertising campaigns. As you know, ROAS specifically measures revenue generated directly from advertising campaigns. Therefore, the goal of ROAS is to determine whether a campaign is effective or not.
ROI takes a broader approach in that it determines the profitability of the campaign based on total expenditures. When calculating ROI, you need to take into account factors like campaign software costs, management fees, creative consultation fees, etc.
At the end of the day, ROAS and ROI are both important metrics but should be used for different things. ROAS should be used to determine the effectiveness of a specific advertising campaign whereas ROI should be used to determine the effectiveness of your entire advertising department and overall strategy.
It’s easy to calculate ROAS with this simple formula:
This formula indicates how successful your advertising strategy is by determining how much money you earn compared to how much money you spend.
Formulas are great, but practical examples are better. So, let’s say that an apparel company spent $10,000 last month on Paid Social, focusing on Instagram paid advertising, TikTok paid advertising, and influencer partnerships. They also spent $1,000 on search engine optimization (SEO) efforts, in addition to $1,000 paid search engine advertising for a grand total of $12,000.
Now that you’ve calculated your advertising costs, next you need to calculate your advertising revenue. When accounting for both direct purchases and new leads from your advertising efforts, you come up with a total revenue of $20,000.
Finally, it’s time to plug these numbers into the formula, “ROAS = Revenue / Cost” or $20,000 / $12,000, which equals $1.67. This means that for every $1 spent on advertising, you earn $1.67 in return.
Even with the ROAS formula, it’s difficult to determine what’s a “good” ROAS and what’s not. For example, you might think that your ROAS is “good” so long as it’s above 1 since that means you’re not technically losing any money.
However, average ROAS rates tell a different story. Average ROAS varies a lot by industry, but generally speaking, you should aim for a 2X ROAS since this means that you’re earning twice as much as you’re spending. So based on this standard, the 1.67X ROAS from the example above definitely has room for improvement.
After all, in business you don’t just want to be “good” — you want to be great! As a result, you should shoot for an even higher ROAS that’s closer to 4X than 2X to essentially quadruple your return, rather than just doubling it.
ROAS is a key advertising metric that every business should be actively monitoring to ensure that you’re spending your advertising budget as efficiently as possible. Before you know it, a low ROAS can result in thousands of dollars lost. Let’s go back to our previous example.
The initial calculation gave us a ROAS of $1.67 with $20,000 in revenue. The subsequent calculation gave us a ROAS of $4.00 with $48,000 in revenue. Therefore, it’s not out of the question to more than double your advertising revenue when you pay attention to ROAS.
If you currently fall closer to the $1 to $2 range in terms of ROAS and want to be closer to the $3 to $4 range, here are some tips to help you improve your ROAS.
Your search keywords are the basis of your entire advertising strategy. If you aren’t using the right keywords, your ads aren’t going to be as effective and you’re going to have a low ROAS as a result.
Before you spend any additional money on advertising, you need to dive into keyword research. Keyword research helps you understand what language your customers are using when they’re searching for your products and services. When you know what language they’re using, you can use the same language to improve your SEO efforts.
When conducting your keyword research, you need to focus on relevance, authority, and volume. Relevance refers to how relevant (search volume, relation to your customers, etc.) your offerings are based on what people are searching for. Authority refers to how informative and reputable your website is. Volume refers to how many times a keyword is searched per month across all audiences.
It’s not enough to include positive keywords in your advertising efforts, you also need to incorporate negative keywords (which let you exclude certain terms from your campaign so you can focus on the important ones instead). Using negative keywords prevents your content from showing up when specific keywords are searched. This approach ensures that you’re only paying for relevant and high-converting traffic.
Specifically, using negative keywords is helpful when there are many different interpretations and uses of a word or phrase. Let’s take the word “glasses,” for example. The word glasses could refer to everything from eyeglasses to wine glasses and drinking glasses. So if you’re a direct-to-consumer brand trying to sell high-quality eyeglasses, you should definitely use “wine glasses” and “drinking glasses” as negative keywords in your Google Ad campaign.
Once you have your keywords nailed down, it’s time to consider your targeting tactics. Your advertisements are only going to be effective if they reach the right people. For example, if you’re selling shoes for female professionals, you need to make sure that your advertisements aren’t shown to middle-aged men.
The good news is that most social media platforms make it easy for you to refine your targeting mechanisms to reach the right people. Facebook, for instance, allows you to target people based on demographic factors like age, gender, and education; geographic location by city, state, or country; interests; hobbies; behavior; and connections.
The more you know about your target audience, the better you can target them. If you’re not quite sure who your target audience is, it’s always helpful to look at your current customer base or social media followers. Using this as a foundation, you can begin to build a more comprehensive customer persona (a profile of your customer that will help you identify what they want) by filling in the blanks about your customers’ wants, fears, motivations, hobbies, and more.
Before you launch your advertising content, it’s always a good idea to test it to make sure that it’s actually effective before you start spending money. The best way to test advertising campaigns is with A/B or split testing. With A/B or split testing, create different versions of your ad — each one with a single difference so that you can test specific variables to see which is performing best
For example, you could change a color, image, or font on version B and compare it to version A to see which one performs better. If version B performs better, then you know it’s due to the change in color, image, or font that you made rather than other factors that are nearly impossible to determine or measure.
With several rounds of A/B testing using multiple variations, you can select the best-performing characteristics and combine them into the most effective campaign with the overall goal of boosting your ROAS.
Paid media can be quickly squashed by poorly-designed landing pages. If you’re looking for actual conversions to boost your revenue, and therefore your ROAS, then you need to make sure that your landing pages are up to par with the rest of your content.
To optimize your landing pages that drive conversions (turning a website visitor into a customer), you need to incorporate clear and compelling language, contrasting colors, and a simple design. You should incorporate social proof onto your landing page along with contact information for any questions. Finally, consider using scarcity techniques (basically, people value something more if it is to compel quick action and boost conversion rates.
Another thing you can do to optimize your landing pages is to make them mobile-friendly. But don’t just stop with your landing pages — make sure that your entire website is mobile-friendly.
As a result, it’s definitely worthwhile to improve the mobile-friendliness of your landing pages and website to make it easy for mobile users to browse for products, get information on your products, ask questions about your products, and eventually purchase your products.
In 2022, it’s easier than ever to create a high-performing advertising campaign with a good ROAS thanks to automation (this makes your jobs less tedious and frees up bandwidth for more complex operations such as strategy). Technology has advanced to the point wherein it can be used to improve the performance of advertising campaigns of all types.
For example, there’s automated ad bidding wherein an algorithm sets your ad bids for you based on the ad’s likelihood to result in a click or a conversion to help you achieve your goal — whether it be increased clicks, visibility, or conversions. With Google SmartBidding, you’re even able to set up your bidding strategy to meet a target ROAS. All automations have the ability to improve ROAS, depending on what your specific needs are.
However, no matter which automated bidding strategy you use, you’re able to improve your ROAS by bidding the lowest amount that it takes to win — eliminating unnecessary spending in the process.
While technology is great, you shouldn’t base your entire advertising approach on that alone. As it turns out, there’s still no substitute for human knowledge and experience. We have found that artificial intelligence works best alongside human intelligence.
So where can you get the human knowledge and experience your business needs to improve its ROAS? Look no further than MuteSix.
MuteSix is a performance marketing agency that creates value for direct-to-consumer brands with breakthrough creative, targeted media buying, and data-driven results. After working with MuteSix for just six months, our clients see an average 359% increase in revenue. Overall, we have helped our clients earn over $1 billion in trackable revenue.
We offer a whole host of different marketing services depending on your needs. For example, we work with Facebook, Instagram, Google, YouTube, Snapchat, TikTok, Amazon, Pinterest, and more. We also offer creative services through our in-house creative studio, StudioSix.
This is just an overview of what MuteSix can do. For more information and a complimentary marketing consultation, reach out to our team today.
Sources:
What Is Return on Ad Spend, or ROAS? | The Balance Small Business
A Beginner’s Guide to SEO Keyword Research in 2021 | Forbes
10 Tips for Creating Landing Pages That Convert the Most Prospects | Entrepreneur