We are in a digital era and many companies are shifting to spending their money on digital advertising as most consumers are on the internet. Every business, no matter what sector they are in, wants to make the most out of each dollar they spend on advertising. The question is: Is it worth it? Return Of Ad Spend (ROAS) has become a leading metric of choice for many businesses because it measures the revenue gained from advertising compared to the money they spend on ads. Furthermore, it helps business owners and entrepreneurs to analyze and determine their digital advertising spend. With this in mind, we have put together a guide on understanding and optimizing ROAS.
What is ROAS?
ROAS is a metric tool that weighs generated revenue from ads against the money a company spent on its advertising. It helps businesses understand and learn whether their advertising is effective or not. Not only that but ROAS also provides companies with an outlook to evaluate their advertising and improve and modify the methods they used in their advertising.
The calculation for ROAS is just a simple division process. First, get the revenue generated from the advertisements and divide it by the total cost spent on the ads, then the result. This quotient will be the ROAS. Here is the formula on how to determine digital advertising spend: ROAS = Campaign Revenue / Campaign Cost.
Keep in mind that ROAS is not to be confused with ROI (Return Of Investment). ROAS measures the success of specific tactics, while ROI measures the success of an overall strategy.
What is a Good ROAS?
The most common benchmark for a good ROAS is a ratio of 4:1. This means that for every dollar a company spends on an ad, there is a return revenue of four dollars. 3:1 is another ratio that indicates a breakthrough of income. For a dollar spent by the company on its ads, three dollars will return as revenue. A ROAS proportion of 2:1 or 1:1 means that the company is more likely to lose money, affecting their business' health which is not good news for the owners and entrepreneurs.
ROAS Example
To put ROAS into perspective, we will give an example situation: an IT company needs to promote their new software. Their marketing adviser approved $2,000 on advertisements to be spent on social media. This company generated $6,000 on clicks originating from the advertisements.
To know the effectiveness of their digital advertising campaign, the marketing advisor gets the ROAS by dividing the total amount generated from their promotion, which is $6,000, to the total amount they spent on the ad itself, which is $2,000. The ROAS of the IT company is 3.
So, it means that for every $2 they spend, they are generating $6 as an income or a ratio of 6:2 or 3:1. In general, a successful ROAS is 4:1 and a low ROAS is 1:1. Because the IT company got a ROAS of 3:1, it is considered profitable.
Why is ROAS essential?
Relying on metrics such as traffic, followers, and visibility is no longer enough to be considered in decisions concerning marketing and advertising. ROAS is an important metric because it shows real-time and exact data. It helps businesses determine which of their advertisements are successful or not. By analyzing ROAS, businesses can decide whether to continue an ad or not based on the revenue each ad generates. This helps them save money and re-align their allocated finances based on their needs. Because of this, ROAS is essential in determining the overall health of businesses and the effectiveness of each marketing campaign.
As mentioned earlier, ROAS provides data that will guide owners or executives to analyze the effectiveness of their marketing campaign through ad revenue. ROAS also offers insight into both present and future advertisements. When the ROAS is high for an ad, it signifies its success and increased revenue. This will benefit a company because they know they are getting good results. In this vein, a company can model its future advertisements based on the successful ad. On the flip side, when the ROAS is low for an ad, a company will pull this ad because it is not generating enough revenue. They now know not to run ads that have a similar model.
How to Improve Your ROAS
Looking to improve your ROAS? We’ve put together a list of three easy strategies for you to improve your ROAS, regardless of whether you are an owner of a start-up or a big company.
1. Set a Benchmark
To improve ROAS, you need to set a benchmark for all of the advertisements on social media platforms/search engines to determine which campaigns are working. You can get a benchmark if you have the revenue data from each ad campaign on its respective social media platform/search engine. This data has to be sorted into weekly or monthly time intervals to see the progress of each ad. You will also need to merge your ad campaign data into one file so that you can truly understand each advertisement’s performance and compare them to one another. With this level of insight, you will be able to see issues and opportunities more efficiently and act on your budget right away.
2. Narrow Your Audience
Focus on targeting an audience that you know is a good fit for your product or service to improve ROAS. You should be focusing on advertising to consumers who potentially have a high conversion rate. Instead of spending an ad with a vague audience, target the consumers who have recently visited your page or website. Buyer personas, Facebook Ads, and Google Ads are good ways to create and target an audience who are interested in your products and services. These tools will also help you filter out audiences less likely to convert, which helps you gain a more targeted audience.
3. Use Keywords Wisely
In addition to targeting the right consumers, you need to target the right searches. Keep in mind that although a consumer may fit your target profile, it doesn’t mean they are in the right phase of their buyer’s journey. To avoid irrelevant impressions and clicks, use negative keywords. It is also a good idea to make use of long-tail keywords because users who are more specific are more likely to be ready to make a purchase. This lowers both competition and cost, allowing for higher conversion rates.
Key Takeaways
Having a good ROAS allows you to spend on advertising in a less risky environment. However, improving your ROAS isn’t always simple. It takes continuous testing and optimizing at every phase of your funnel. Brands and businesses must stay on top of their advertising campaigns and efforts to really see the results they want. ATAK Interactive can help you determine ROAS strategies to grow and expand your business. Interested? Contact us for more information.
