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What is ROAS (Return On Ad Spend)?

June 19, 2020
David Sharpe
written by David Sharpe

Have you heard of ROAS? It stands for Return On Ad Spend and measures how cost-effective your PPC campaigns are. Find out more in our guide.

While setting up your PPC plan, chances are you’ve heard the term “ROAS”.

ROAS stands for “return on ad spend” and measures how much revenue you make based on the amount you spend on advertising.

How to calculate ROAS

Calculating your return on ad spend for any given marketing or advertising campaign is straightforward. Here’s an example:

Say your company spent £5,000 on a campaign in January. For that month, the campaign generated £20,000 in revenue.

The ROAS would be £20,000 divided by £5,000 = £4. So for every £1 you spent in January, you earnt £4.

As a percentage, that’s 400% or a 4:1 ratio.

This metric can help to increase your profit margin, as you can determine which advertising methods are proving to be the most beneficial for your business.

If you’re familiar with the concept of ROI (return on investment), you may be thinking that ROAS is very similar. However, it’s important to understand ROI is general metric while ROAS focuses on ad spend only.

Relationship with other metrics

ROAS can also tie in with CPL (cost per lead) and CPA (cost per acquisition). While CPL and CPA help you to budget your marketing campaigns and can give you an aim of reducing the costs of leads and acquisition (therefore reduce the outgoings in your marketing campaigns), ROAS can help you to determine whether it’s actually worth investing in these leads and this acquisition in the first place and whether you should continue focusing on these areas – no matter how cheap they may be.

What is a “good” ROAS?

Much like a good Google Ads CTR, there isn’t a definitive answer. The example above is regarded as a common benchmark (400% or 4:1). Your criteria to determine a good ROAS depends on things like:

  • A need for higher returns to maintain financial stability
  • The goals and targets you set (e.g. if you’re focused on growth or brand awareness, ad spend might be higher)

Some businesses require a ROAS of 10:1 in order to stay profitable, while others can grow substantially at just 3:1. A business can only gauge its ROAS goal when it has a defined budget and firm handle on its profit margins. A large margin means that the business can survive a low ROAS; smaller margins are an indication the business must maintain low advertising costs. An e-commerce store in this situation must achieve a relatively high ROAS to reach profitability.

How to improve your ROAS

There are a number of ways to improve your return on ad spend when using Google Ads. Here are a few to consider:

1. Adjust bids based on devices

When using Google Ads, you can set different bids for mobile, tablet and desktop devices. Desktop tends to be default, but if you know your users are more likely to make purchases when shopping on their tablet or smartphone, you may want to adjust your bids for these devices. Generally speaking, however, people tend to use smartphones to browse rather than buy, so you may want to reduce your bids for smartphones.

2. Adjust bids based on time and location

Again, consumers tend to share similar behaviour in purchasing less through the night – as many are asleep – or through certain hours of the day – when many will be at work. You may want to reduce your bids during these times, as they’re less likely to convert to sales. This can improve your ROAS.

3. Add a branded campaign

Branded campaigns can drastically improve your ROAS. It has been founded that branded ad campaigns can get between twice and four times the return on ad spend as non-branded campaigns. Now, many marketing managers will say that it’s a waste of money bidding on your own brand name, as customers searching for it are likely to complete a purchase without your paid advertising anyway. But this comes with a risk. If you don’t bid on your own name, competitors are likely to and could swoop in and take your sale from under your nose. Bidding on your own name gives you more control over what customers see when they search for your name.

4. Add negative keywords

Adding negative keywords may sound odd, as a negative keyword is actually a word that prevents your ad from showing up in search results. But it can help to reduce your ad spend on areas you don’t want to spend on and improve your overall ROAS. If you’re advertising dog food and someone searches “what is the worst dog food” your ad could match the key terms “dog food” and show up. By adding “worst” to your negative keywords, you could prevent your ad from showing up in that search and you won’t have to pay for it showing up in that search.

Is ROAS better than CPA (Cost Per Acquisition)?

ROAS and CPA are two of the most commonly used and popular key performance indicators (KPIs) for ad campaigns. But which could prove better for your business? Well, the answer depends on your business and its aims.

CPA is great if you have a fixed cost payout model, which makes it ideal for lead generation. However, if you’re working in the realm of e-commerce, it may not be ideal for you.

In a similar vein, ROAS is great for businesses operating within the realm of e-commerce that may have revenue that varies greatly between purchases (for example, in an e-commerce store, some users will purchase just one item, while others may fill their cart and check out a haul).

Conclusion

ROAS is an area that every business needs to focus on and improve.

It’s a great means of determining the efficacy of any marketing or advertising campaign you’re running and can ensure that your business is only engaging with and investing in activities that are proving profitable for the company and worth the time, effort and money that is being poured into them.

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Author
David Sharpe

David Sharpe
Co-founder and director of Adzooma, David has helped to grow the company from a start-up to being at the forefront of cross-channel marketing optimisation and automation. Having founded, built and successfully exited multiple online marketing companies over the last 15 years, David understands the challenges of growing a company and enjoys the fast-paced, challenging environment.
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