Decoding ROAS Meaning: An Essential Guide to Return on Advertising Spend
Marketing campaigns these days are driven by data more than ever, with experts emphasizing efficiency and stability more than visibility. This drives competition tighter, with marketers striving to innovate with strategies that aim to get more leads while spending as little as possible.
But of all the metrics used in digital marketing, ROAS is perhaps the best indicator of whether a campaign is worth the budget or not. Just how important is this marketing metric and how can it be used to refine advertising campaigns?
In this article, we’ll decipher ROAS meaning beyond what it stands for as an acronym.
ROAS As a Metric
ROAS or Return on Advertising Spend, is simply a measure of how much revenue is earned for each dollar spent on ads. It’s a key performance indicator (KPI) ideally used with complementing metrics like cost per lead (CPL), cost per acquisition (CPA), and cost per click (CPC) to measure an advertising campaign’s success considering the budget.
Not to be confused with Return on Investment (ROI), which measures the success of the campaign’s overall strategy, ROAS only measures the efficiency of specific strategies, at the ad level. This helps marketers identify which tactics need to be reviewed and improved.
How Important is ROAS in Marketing?
Often an underestimated metric, ROAS often takes the backseat as it isn’t used as much as it should be. Since it’s primarily a measure of marketing efficiency, which spills into critical aspects of business such as capital spending and revenue generation, it should be leveraged as much as possible. Here are the areas in marketing where ROAS can prove to be indispensable:
- Quantitative evaluation – this metric paints a clearer picture of the true value of an ongoing marketing campaign in terms of revenue and just how much it has contributed to the business’s bottom line.
- Predictive strategy – as a specific metric that can show which campaigns are working and which aren’t, it will be easier to figure out which channels and campaigns need new strategies. This also facilitates better efficiency in the allocation of resources.
- Understanding your audience – the data from this metric offers insights into an audience’s pulse, which is key to producing campaign materials that can appeal to potential customers.
- Ad optimization – based on results, ads can be tweaked and improved so they’re properly optimized for search engines and target audiences.
Using ROAS for Advertising Efficiency
Figuring out this metric may sound complex in the beginning, but the formula to calculate ROAS is as simple as dividing the ad revenue by the campaign’s cost:
ROAS = (Revenue / Campaign Cost)
So, for instance, if you’re running an ad campaign worth $500, then you conclude with a $3000 revenue, simply divide the generated revenue by the total campaign cost:
$3000 (revenue) / $500 (cost) = $6
This means the business earned $6 for each dollar spent on the campaign. Of course, the higher the ROAS is, the better. But if your ROAS score is equal to a dollar or worse, less, then it’s time to reconsider your strategies.
Next, remember that ROAS is best used with other metrics to get clearer insights into ad spending. Here are some of the most recommended metrics that can complement ROAS:
- Customer lifetime value (CLV)
- Cost per lead (CPL)
- Cost per acquisition (CPA)
- Cost per click (CPC)
Keeping an eye on these metrics can help business owners plan future strategies, budgets, and investments with a more defined direction. But, if possible, it’s ideal to use tools and software solutions designed to monitor the above metrics as they’re particularly helpful in ensuring the accuracy of the evaluation results of each campaign run.
Don’t forget that there are also considerations when it comes to determining the ideal benchmark or break-even point for ROAS. Although the common benchmark for ROAS is a ratio of 4:1 or $4 revenue for each $1 spent, remember that this may change depending on the business’s overall health, profit margins, and typical operating expenses. Considering these factors, there are businesses that could require as much as 15:1 or as low as 2:1 to grow and remain profitable.
This explains how some businesses with larger profit margins manage to stay afloat even with low ROAS. On the contrary, if the margins are smaller, marketing costs are best kept to a minimum.
Optimizing Your Campaigns for ROAS
Once you have a good grasp of how ROAS works, you can begin optimizing your ads and accounts, preferably with the help of more experienced digital marketers.
Set The Benchmarks
Set a benchmark by defining budgets and profit margins that will serve as a guide in establishing a good ROAS ratio. You’ll also need to get a baseline of which marketing channels are performing well and which ones aren’t.
Collect And Leverage High-Quality Data
The volume and quality of data you use matters. Combine engagement data from the top to the bottom of the sales funnel when analyzing profitability. Evaluating performance also requires a significant volume of data before you can start splitting out the next campaigns.
Target Specific Groups
Use specific and contextual segmentation when targeting audiences based on the products or services offered. Do not cast your net wide. Target potential customers based on their previous actions in any of your channels using personalized creative campaigns. It’s best to exclude audiences with a low propensity to convert, especially if you’re working on a budget.
Review Ad Keywords
Checking keywords for conversion and returns helps determine what works and what doesn’t. Look for keywords with higher spend but have zero conversions, search keywords that convert, and keyword sets with high budgets but low returns.
Use Software Solutions
Monitoring, collecting, and analyzing data require countless hours of work. But with modern solutions available to marketers these days, improving your ROAS score doesn’t have to be too complex. There are tools that can help you keep tabs on your campaign’s ROAS across multiple channels, segment and filter audience groups, and analyze campaign data based on your set metrics.
With these steps in optimization, you can also enhance your lead generation efforts along the process, as this is one area in marketing where ROAS can be particularly useful too.
More than just an e-commerce metric, ROAS passes a magnifying glass over capital efficiency. With the right benchmarks and tools, you can use them to make profitable decisions with minimal investment risks.
Now it’s time to find out which campaigns are worth running and expanding.