When it comes to advertising efforts, ecommerce merchants should be looking to capture the most amount of business for every dollar spent on ad campaigns. We all know the term return on investment, or ROI. Return on ad spend is similar to the model of calculating ROI. You’re investing dollars into advertising campaigns in the hope that this will generate leads and increase the revenue generated.
What is the definition of return on ad spend (ROAS?)
Return on ad spend can be defined as the amount of revenue generated for every dollar spent on advertising. ROAS is a key metric used by an ecommerce business to identify the success of a specific marketing campaign. It enables businesses to forecast exactly how much revenue they can expect to generate from their advertising spend over a given time period.
How to calculate ROAS
Calculating your return on ad spend can be similar to calculating your ROI. Dividing the dollars spent by the revenue generated by a specific ad campaign will give you your ROAS.
The ROAS formula is:
ROAS = (revenue gained from ad campaigns / ad spend) x 100
A great example of this can be found in digital advertising. When looking for the ROAS on a specific ad campaign, you can take the sum of the ad costs for paid ads, such as pay-per-click (PPC) and paid social. You can then find the sum of the revenue generated from those activities. Revenue generated, in this case, would be the deals that have closed as a result of this campaign. With low advertising costs, the higher your ROAS will be.
Let’s say your digital marketing team spent $1,000 on an advertising campaign, and $5,000 of revenue was generated. Your return on ad spend would be 500%, or a 5:1 ratio.
According to BeProfit, the current average ROAS for ecommerce businesses is 2.87:1, or a 287% return on ad spend.
The importance of evaluating your return on ad spend
Developing a strong, flexible marketing strategy is key to getting the most revenue for the least amount of spend. Using past ROAS data can help in building a solid plan to increase your overall return while also ensuring you’re hitting your target audience at the right time.
With any digital medium, audience targeting and ad campaigns to hit those audiences are constantly shifting and changing. That’s why it’s so important to have a continuous interpretation of your marketing metrics, and to continuously refine your campaigns to maintain your target ROAS.
Paid ads aren’t the only way to get in front of your target audience. A robust marketing strategy tackles the customer journey and ensures there are activities for prospects at every stage. Things like search engine optimization (SEO) to drive organic traffic, or targeted email campaigns to your database, are free tools you can leverage to capture interest outside of paid efforts.
Other metrics to consider when evaluating the performance of an advertising campaign are: Vendor costs and return on investment (ROI) of any tools you’re using, customer lifetime value (LTV), cost-per-lead (CPL), and click through rate (CTR). You’ll often notice that a good ROAS means that these other metrics are also in good standing.
Pairing these metrics together allows for digital marketers to evaluate the efficacy of their campaigns and plan where to spend their marketing dollars for greater efficiency and return.
How to improve your return on ad spend
At the end of the day, generating revenue is a key function of the marketing team. By building in efficiencies to increase the performance of marketing campaigns, you can do more with less, bringing new leads to the table and more revenue to the bottom line while reducing overall costs.
However, in today’s highly competitive marketing environment, maintaining a high ROAS can be difficult. Relying on a single ad campaign to maintain your target return on ad spend can result in a very sharp decline if anything goes awry.
Pairing your overall ad campaign strategy with non-paid activities can help increase brand awareness, which in turn can help the overall success of your marketing efforts. A great way to do this is to utilize marketing tactics like email and SEO while running ads with similar or complementary messaging. As prospects see your ads and find interest in your product, they can take action—whether that’s going to your website, or a specific landing page. Once their information has been captured, you can send them targeted emails to drive their interest further. As they convert, the attribution model still ties that revenue to your initial ad campaign, helping to increase your ROAS.
Another way to increase your ROAS is to use existing data to make informed decisions before a campaign is even launched. Let’s say you had a paid search campaign that resulted in a low ROAS. Look at the specifics of that campaign: What ad groups were used? What was the bidding strategy? What was the audience targeting? Were there wrong keywords being bid on?
Pivoting on the areas that contributed to the low ROAS can help you identify areas to test out new strategies. If the ROAS calculation remains low, you can look harder at the overall messaging, product offering, or the specific ads that were used to try to generate revenue.