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PPC (Pay Per Click) advertising is one of the most profitable ways to grow a business. And if you are managing a PPC campaign, then you need to understand a handful of critical metrics and formulas that determine success. One of these is ROAS (Return on Ad Spend).
You may have heard of this before. You might even be asking what makes it so important. Well, like any industry, you need to watch your spending on advertising. You can then understand if you’re getting the kind of return you need for a particular ad, campaign, or other marketing activity.
This article will discuss the ROAS formula and how it can be used to help you improve your campaigns. We will also discuss specific ways to increase the ROAS once you know how to put the formula in context. Let’s get started:
The first thing you need to know about your paid ad campaign is how much you have spent on it. For example, if you’re running a Google Ads campaign, then you should be able to check the total ad spend for the life of the campaign or a specific month.
This amount will include every penny you’ve ever spent on that campaign and, therefore, will be the “total ad spend.” It’s important to know that this figure will be the amount you have spent on advertising.
It won’t include any additional fees such as the cost of tools, rent, management fees, and wages. If you’re trying to work out how profitable paid advertising is for your business as a whole, then you’ll want to make sure you include these expenses.
Now you know how much you’ve spent on your campaign, it’s time to see how much you’ve made. The next crucial figure in the ROAS metric is the gross revenue. This is calculated by working out how much revenue your paid advertising has brought in.
Let’s say you are running a campaign where spending $1,000 on your campaign brings in a total of $5,000 from your ads. The return on ad spend can then be calculated by dividing total revenue by ad spend:
ROAS =$5,000 / $1,000
In the example above, your return on ad spend is 5. That means for every dollar you spend on advertising, you are bringing in $5 in revenue.
Let’s take another example where you have allocated $5,000 of your marketing budget to a campaign. By tracking the clicks that the campaign generated and following them through to check-out, you’re able to determine that those clicks generated $10,000 in conversions.
With the ROAS formula, you can check how much you are generating through your ad spend.
ROAS=10,000/5,000
In this example, you are making $2 in revenue for every $1 spent on ads. However, is this good or bad? That’s what we’ll explore in the next section.
Every business is unique. You have your costs, overhead, and various expenses that go into running your company.
This is why your profit is essential to understand, not just the revenue. You might have rent, payroll, packaging, insurance, travel, and a million other things that are crucial to running your business and, therefore, your campaigns.
The larger your profit margin, the lower your ROAS can be. Let’s say that you have a ROAS of 3 on a campaign. So you are bringing $2 of revenue for each dollar of ads.
So there is no standard you can define that this is the ideal ROAS, it all depends on your goals and your overall costs as well. But you can remember the following points to at least have an idea about bad, good and ideal ROAS.
When talking about ROAS, it’s natural to ask how it’s different from return on investment (ROI). ROI calculates how much your company makes from advertising (or another channel) after expenses, including operational costs, turnover, and more.
In comparison, ROAS determines how much your business earns (on average) from advertising only. Since they measure different aspects of your campaign, ROAS and ROI also use different formulas.
If you’re struggling to remember the differences between ROI and ROAS, think about the two from this perspective. ROAS measures your average return from advertising, while ROI measures your total return from advertising.
ROAS can’t be applied to all marketing efforts. For you to assess any marketing campaign using ROAS, its true cost should be concrete.
For instance, since PPC advertisements usually have a concretely-defined budget, establishing the return on advertising spend for a PPC campaign requires that you divide revenue by cost. On the flip side, many marketing campaigns’ actual ad cost can’t be determined on a per-instance basis.
As you probably know, not every marketing effort will translate to conversion, and many initiatives are not meant to do so as well. Some initiatives like newsletters and blog posts are supposed to capture the target audience’s attention and get them to engage more with a brand.
Others, like testimonials and customer reviews, are deal closers. In simple terms, it wouldn’t make sense to evaluate the return on ad spend of any top-of-the-funnel marketing effort.
Although these initiatives could play a crucial role in the customer’s buying decision, since the aim isn’t to make a direct sale, there isn’t sufficient reason to bring in ROAS when assessing the overall campaign’s effectiveness.
It can be challenging to assign attribution. When the customer engages with a specific ad, you still can’t always say for sure that this ad was the reason they converted.
Throughout any given sales funnel, a customer’s journey will involve various touchpoints. They might have clicked on an ad, but maybe they were browsing product reviews before that. Or perhaps they read a glowing blog post.
There are multiple ways someone can become a customer or otherwise complete a conversion. Typically ROAS is attributed to either the first touch or the last touch. Make sure to set up analytics to track as many touchpoints as possible to assess attribution accurately.
The ROAS formula is simply a tool. It is used to understand where your campaign is working and where it is not. If your ROAS is above 4 or 5 to 1, then you’re doing well. If it is below this number, then your campaign needs work.
So what are some ways to improve your ROAS? They come down to improving your marketing techniques in the first place:
In marketing, everything comes back to your audience. If you fail to think about your customers, you’re going to have a bad time.
You can understand your customers’ mindset and journey if you create a customer avatar. This should include various information about your ideal customer.
Where are they from? What is their age? What kinds of problems and desires keep them up at night?
Do your best to dig into the psychology of your buyer. This is the bread and butter of marketing. Everything else will flow from this because marketing does not happen in a vacuum. It requires real people to take action to meet their needs.
How consistent are your branding and PPC messaging? Are you staying firm to your core beliefs and promises as a brand? Are your logos and slogans and offers aligned?
If you continually jump back and forth, it may be difficult for customers to really believe that you are great at providing one thing. When starting, remain as consistent as possible.
Of course, as your brand grows, you can branch out. However, throughout everything, there should be a consistent throughline that tells people who you are. Otherwise, they might be confused or even worse — they might forget your brand altogether.
We live in an age where more and more people are using their phones for everything. From shopping to banking to personal errands, consumers can use their mobile devices to accomplish most of their needs on a daily basis.
The coronavirus pandemic of early 2020 only sped that process up. If you are a brand that is not thinking with a “mobile-first” mentality, you are very likely to fall behind. You can memorize the ROAS formula, but it’s not going to save you.
Ensure that your web pages are coded to match each user’s screen size and device type automatically. While you can’t do this for every device out there, you can do it for the larger brands that most of your core audience is going to be using. The result will be better conversions.
Like in any industry, you can always learn something from your competitors. Perhaps they are generating an insane amount of clicks on an advertisement. Or maybe their conversion costs are lower.
You can’t always know their exact numbers; however, there is a shortcut to doing competitive research: time. Now, you might be thinking that “time” isn’t a shortcut at all, but in reality, you can simply sit back and let your competitors run their ads while you watch.
Over time, you can begin to see if they are running certain ads over and over again. If they are, it means that those ads are profitable. And you don’t need a ROAS formula to tell you that if competitors have a profitable system, it’s worth exploring for your own brand.
Another way to decrease ad spend and thus increase ROAS is to set different bids for your ad campaigns based on the type of device – mobile, tablet, and desktop. Desktop ads are typically the default ad, so based on your desktop performance, you can adjust the ads on other types of devices accordingly.
If you find that more users on specific devices are purchasing more frequently, you’ll want to set the bid higher for that device. For example, trends show that consumers are often more likely to browse on their mobile devices but buy on their desktop.
If you find that this is true for you and more of your conversions are coming from desktop, you’ll want to adjust your mobile bids.
Turn the mobile bids down in this scenario so that you are spending less on mobile and funneling more of your PPC ad budget to the ads that are converting best.
Don’t underestimate the importance of time and location. You might be running your ads for 24 hours, but it could be a waste of money if you look at the data. If 80% of your conversions occur between the hours of 10 am and 4 pm, consider throttling your spending to those hours.
Additionally, each location will have its own performance metrics. Perhaps your product sells best in large coastal cities, whereas rural areas convert at much lower rates. This could be due to shipping costs or any variety of factors, but the answer remains the same: spend your budget where it performs best.
Google has something called the Quality Score. This is a 1-10 scale that essentially judges the quality of your PPC ad. It mainly involves the clickthrough rate (CTR), ad relevance, and landing page experience
Your Quality Score will affect how much you pay for ads and how highly you rank. Also, it will either put you behind your competition or give you an advantage.
For instance, let’s take two brands: A and B. They both bid for the exact same keyword, and they bid the same amount. If all other things are equal, the brand with a higher quality score (for example, 7 compared to 5) will win thanks to Google’s algorithm.
Once you internalize the ROAS formula, you will begin to see which ads are underperforming. These are the first places to look when taking on the task of improving your Quality Score.
Let’s look at three key aspects of this score so you can improve them for a better ROAS.
Your CTR is a vital component of online advertising. This would be true even without the advent of the Quality Score. However, when you consider that it can affect how much you pay for clicks, it’s even more important.
When you increase the number of users clicking on your ads, it signals to Google that your ad is likely to meet their needs (or queries that they typed into the search bar).
First, make sure that you include the right keywords in your ads. There is no shortcut for excellent keyword research and really “speaking the language” of your audience.
Secondly, use marketing psychology principles. Write headlines that catch attention and get right to the point. When possible, be specific with your promises instead of vague.
Thirdly, always include a call-to-action. Although it might sound silly, simply saying “click” or “call” or “buy now” is far more effective than leaving it up to your audience to know what to do. It shows confidence and tells them exactly how to connect with your solution.
You can’t simply create an irrelevant ad and bid the highest on a keyword and hope to generate conversions and a successful ROAS. You need to make sure that you are actually making your ads relevant to your audience.
For instance, if you spam certain keywords, but the rest of your ad is made up of copy related to a different industry, Google will catch on and penalize your Quality Score. And if your score is low, your ROAS can’t give you the complete picture yet.
Optimize landing pages for speed, usability, and conversions. Far too many landing pages are slow, clunky, and outdated. Many tools help you compress images, load resources more efficiently in today’s day and age, and use newer technologies that don’t take up so much space.
Furthermore, make sure that your navigation is easy to use. Your users should only ever be a few clicks, taps, or scrolls away from the action they want to take. Google will also look to see if your keywords and content match up with your ads, so stay consistent from the first ad all the way to the final conversion page.
Getting deep into the analytics of the ROAS formula can get tiresome and complicated. You can narrow down the time and amount of work you need to do by using a tool to help you.
PPCexpo is such a reporting tool. It helps you measure ROAS performance so you can identify areas for improvement. For instance, each brand will value different conversions uniquely.
Whereas brand awareness may be a priority for a particular campaign, final conversions such as purchases may be more important in another. There can be various weighted importance among metrics depending on your goals.
Having a tool at your disposal allows you to input the kind of data you’re looking for. Then, you can let the power of technology handle the complicated aspects so you can focus on the actual marketing part of the equation.
PPC is heavily dependent on tried and true marketing formulas. The ROAS formula is one of the most important things to know in online marketing. It helps you understand how well your ads are doing and what needs to be added or taken away.
However, once you know the formula, you need to be smart about looking at the data in context. There are additional costs in marketing and advertising that you might not think about at first.
Finally, it would help if you had strategies to improve your ROAS across all aspects to continue to bring your costs down and your profit up. So if you apply the tips above, you will have a full set of tactics to implement to increase your conversions now and in the future.
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