Improving ROAS (Return on Advertising Spending): What it is, how to calculate it, and how to improve it.
The very thing that drew most people to ecommerce, the low barrier to entry, is causing record levels of competition in ecommerce advertising. Some are going as far as saying ROAS is useless, but it’s an important marketing metric that measures the efficacy of your ad spend.
We’re going to take a quick dive into the what, how, and why of ROAS below, but if you already have that knowledge and are just here for some tips, click here to jump to the section about improving your ROAS.
What is ROAS?
ROAS, or Return on Ad Spend, is a marketing metric that tells you how effective your advertising is. It’s expressed in a ratio of how much revenue is generated for each dollar you spend on advertising.
While other digital marketing metrics are valuable, such as Click-Through Rate (CTR) and Conversion Rate, they don’t address whether your advertising dollars are being spent as wisely as possible as ROAS does.
Let’s go back to grade school math for a second and look at a few scenarios.
Scenario #1: You give a farmer a dollar, and he gives you five beautiful, shiny apples which you can sell for a dollar each. That right there is positive ROAS.
Scenario #2: You give the farmer next door a dollar, and he gives you one small apple, which you can sell for $0.50. You know where I’m going here – negative ROAS.
If the above two scenarios were ad campaigns, which one would you continue to spend money on? The first scenario, right? You would pour all your money into that scenario. Unless you enjoyed losing money, you wouldn’t replay scenario #2.
It’s worth noting that ROAS and ROI are not the same thing, although it may seem like it. ROAS shows you how much revenue is generated compared to the amount you spent on a single campaign. Whereas ROI typically concerns the return of larger investments such as a new software or all TikTok Advertising. (Side note: If you’re a DTC brand, TikTok is an excellent channel).
How do you calculate ROAS?
The good news is that it’s easy! It’s merely a ratio of revenue from your ad campaign to the cost of the ad campaign.
Here’s the formula:
And here’s an example:
Let’s say you spend $10000 on a Facebook ad campaign. You track your clicks and from there the clicks that turned into sales, and you discover that the campaign generated $50000 in revenue. To calculate ROAS you would divide $50000 by $10000. Your ROAS would be 5:1, meaning each dollar you spent generated $5 worth of revenue. If you weren’t paying attention earlier, this is positive ROAS.
On the flip side, if you spent $50000 on an ad campaign and generated $10000 worth of revenue your ROAS would be 1:5. Meaning, for each dollar you spent, you generated $0.20 worth of revenue. Negative ROAS — no one wants that.
Why is Calculating it Important?
Your bottom line matters, that’s why you’re taking the time to read this article. Your overall goal is to increase sales. Calculating ROAS consistently will help you:
Improve your Advertising Results:
Knowing your return on ad spend makes you aware which strategies, advertising channels and content are most successful. By adjusting to the results, you will steadily improve your advertising.
Calculating ROAS regularly can help you identify advertising campaigns that aren’t performing well. Identifying campaigns that aren’t providing a return allows you to confidently stop spending money on things that don’t work and still get the same results over all. This is why we are data nerds – data enables us to make wiser decisions in business!
Do you know how much you need to spend on advertising to get the results you need? If you are consistently calculating ROAS, you do. Your budget will be more accurate when you are aware of how much it takes to get results.
Advertising is only one of your marketing strategies. Knowing your return allows you to compare it to your other processes. How much of your revenue is coming from advertising? How does it compare to the return on your customer rewards program or email marketing? Knowing the return will allow you to allocate money wisely.
What Should Your ROAS Be?
This is probably not what you want to hear, but…it depends.
A good ROAS depends on your business, your profit margin and the goals of your campaign. Your target should be the conversion value you expect for each dollar you spend. In general, though, a good target for direct ecommerce campaigns is between 3:1 and 5:1.
Something to keep in mind here though is customer lifetime value. If you have a subscription based model, you may be willing to lose money on the first sale because you know that in the long run your ad spend will be profitable. In these cases, customer acquisition cost might be a better metric to track.
ROAS shouldn’t be used to measure the effectiveness of campaigns that don’t drive direct, easily measured revenue, such as brand awareness campaigns, top of funnel campaigns, or lead generation campaigns.
Increasing Your ROAS
Ok, now for the reason we are all here – to increase your revenue without increasing your ad spend.
Poor performing campaigns can have several causes, such as poor audience targeting, poor creative, or low conversion rates. We’re data nerds, so we can’t help you out with the creative, but we can give you a few tips on the other two.
Remove Friction: there are multiple steps between an ad click and the checkout. Go through the process and remove any pinch points that may be stopping would be buyers from completing their purchase. Use tools like hotjar to see how customers are interacting with your site once they arrive and why they are leaving.
Communicate shipping charges in advance of checkout: We’ve all abandoned a cart over a shipping charge, and most people say a surprise shipping fee is the number one reason they don’t complete their purchases. Whether you choose to offer free shipping, charge a flat rate, or exact costs, communicating your pricing to customers in advance of checkout will increase conversions.
Upsell customers at checkout. Here’s a great video from Shopify on the how, what, and why of upselling. Some top tools for upselling and cross-selling are:
Upselling your customer helps to increase, Average Order Value or AOV, which in turn increases your ROAS.
Continue the conversation after buyers and browsers leave your website. Many marketers are shouting that ROAS is dead. While we wouldn’t go that far, we would say that it is a bit unpredictable these days. Competition is hot, and you need to build a relationship with buyers as soon as possible. You can do this by capturing their contact information when they come to your website. RAEK captures the contact information from more of your website visitors without them filling out a form or quiz. Allowing you to build early relationships with more people.
The newsletter for marketers who want to make better use of their data.
Sign up for our newsletter to get first-party data marketing tips and strategies, delivered straight to your inbox.