You need to spend money to make money, but knowing how much bang you get for your marketing buck is essential. After all, knowing which ads offer the highest return is key to maximizing your marketing budget.
That's why you need to understand return on ad spend, or "ROAS." In addition, you need to know what a good ROAS is for your industry. That's easier said than done, but Prismfly is here to help you find the answers to all of these questions and more.
What Is ROAS?
Return on ad spend is a vital marketing metric that tells you how much of a return you can expect for the money you spend on ads. Think of ROAS as a measurement of the revenue you generate per dollar spent on ads.
When you track ROAS, you can determine:
- How your advertisements are performing based on how much money they bring back to your business
- Which ads perform the best (and which ads demonstrate subpar performance)
- How much money to spend on given advertisements based on your current return on investment (ROI)
Here’s an example. If you make $9 of revenue per $1 spent, your ROAS is a ratio of 9:1. That’s very high. As you’ll see below, most companies can expect their ROAS to be about 4:1, at most.
Calculating ROAS is straightforward with the below formula:
- ROAS = Total revenue / Total ad spend
In that formula, the total revenue is all the money you made from the target ad campaign or ad type (i.e., not the total revenue you've earned overall). The total ad spend is the total amount of money you spend on the target ad campaign.
Let’s look at a more specific example to break down this formula and see it in action. Imagine you have a total revenue of $20,000 from Ad Campaign A. You spent $9,000 on this ad campaign. Plug those numbers into the formula, and you get:
- $20,000 / $9,000 = 2.2222
Rounding down, that’s a ratio of about 2:1. In other words, you made about $2 for every $1 you spent (or based on the above, about $2.22 per dollar spent).
What Does Your ROAS Tell You?
Your return on ad spend tells you how much money you make for the money you spend on a given ad campaign/ad type.
For example, let’s say you have one advertising campaign with Google PPC, or pay-per-click advertisements. You also have another advertising campaign leveraging social media ads.
When you calculate the ROAS for both campaigns, you find the following values:
- PPC ad campaign ROAS – 4:1
- Social media ad campaign ROAS – 3:1
Both of these ROAS values are reasonably good. You’re making money for each dollar you spend. But it’s also true that the PPC ad campaign gives you a better return for the money you spend on those advertisements.
Given this information, you can make a few different decisions:
- You could shift more of your marketing budget away from social media ads to PPC ads to see if you get even more of a return on that investment.
- You could stop social media ads altogether and put all of the money into your PPC ad campaign.
Bottom line: ROAS tells you how much money you’ve earned from an ad campaign relative to what you spent on it. When compared against other metrics, you can discover which ads perform the best and worst and make changes to your marketing strategy accordingly.
What Factors Influence ROAS?
Many distinct factors can influence your return on ad spend, including:
- Ad type – some types of ads, like online ads for competitive, costly keywords, often cost more than others
- Ad price – As with the above, the cost of each advertisement will affect your total ad spend for the campaign as a whole
- Number of ads in a campaign – The more ads you send out, the costlier the campaign usually is
Note that ROAS doesn’t measure the return on ad spend you get for a single advertisement. You can only use this metric to determine the money you get per dollar spent for an entire campaign or ad type.
What Is the Ideal ROAS To Look for in Your Industry?
The average company should hope to have a ROAS of 4:1, or to earn $4 for each $1 spent on advertising. However, industry specifics – such as the cost of equipment, the cost of running a business, and the cost of advertisements – can impact whether this is a feasible ratio.
Depending on your industry, an “ideal” ROAS might be higher or lower than that 4:1 mark. Different industries have different common ROAS values.
For example, a good ROAS in the TV industry is about 6.5:1, while a good ROAS for a radio company is closer to 4.95:1.
You can figure out a strong ROAS for your industry by considering a few key factors.
Look at Your Profit Margins
First, look at your profit margins. Your profit margins show you how much money you make after accounting for necessary costs, such as labor, materials, marketing, and more. The higher your profit margin is, the more “take home” money your business has to invest in itself, reward shareholders, or expand into new locations.
If you have low profit margins, a low ROAS is more acceptable since you likely need to spend more money on each advertising campaign you put out. For instance, you might operate in a very competitive industry with expensive keywords.
In such a case, a “low” ROAS of 3:1 or 2:1 might be excellent. Those returns on ad spend are strong – they indicate that you make more money on the advertisements you put out than you spend on them.
Look at Your Average Cost-per-Click
Average cost per click or CPC is the average amount of money you spend to earn a click from an ad. You might even pay for your online ads using a CPC pricing scheme.
If you don’t know the average cost per click of your brand’s ads, it’s easy to calculate. Divide the total CPCs your business earned over a given timeframe (like by month or quarter), by the total number of clicks.
Once you have your average CPC, you’ll know how much money you need to earn through ads to make it worthwhile. A high average CPC, again, means a lower ROAS is expected. Higher is always better, but if your ROAS is 2 or 3:1 instead of 4, don’t necessarily interpret that as a loss — make sure to look at it from the context of your industry standard.
Consider the Size of Your Company
Lastly, consider the size of your company. If your brand is bigger, try to shoot for a higher ROAS, such as 6:1 or more. Your brand likely has a more extensive customer base and a greater understanding of its target audience.
The reverse is true if your company is relatively small. You may need to spend more money on marketing and brand awareness at that stage before seeing significant returns on those investments.
What Metrics Should You Consider Other Than ROAS?
While ROAS is an important metric to track and calculate, especially if you want to know how a specific ad campaign is performing relative to other marketing efforts, don’t forget other KPIs to track at the same time. Here are some examples.
CRO or conversion rate optimization isn't a distinct metric by itself, but it is something to push for as a brand. Optimizing your conversion rate – that is, the proportion of site visitors or leads who "convert" into paying customers or subscribers – is always a winning strategy. The greater the percentage of site visitors who convert into paying customers, the more money you can expect to make.
CRO as a practice is best adopted with a multifaceted approach. For example, you can use techniques like:
- A/B testing, where you launch two very similar versions of the same webpage at similar times and see which performs better — this can help you gauge preferred features, layouts, site navigation, and more
- UX and UI improvements, especially to streamline customer experiences or improve navigability
- Personalization, such as personalized email marketing, product recommendations, and more
Fortunately, services like Prismfly can help you with conversion rate optimization and much more. As a specialized CRO and revenue-boosting brand, Prismfly is well-equipped and ready to help your company reach profit levels never seen before.
Sales lift is used to measure the effectiveness of a marketing campaign by comparing the increase in sales during that campaign to a baseline period. It helps you understand the impact your marketing efforts have on your revenue.
To calculate sales lift, follow these simple steps:
- Choose a specific timeframe, such as a business quarter or a promotional week when you ran an ad campaign.
- Calculate the actual sales made during that period.
- Determine your baseline sales, which are the sales you would have made without the campaign. You can use sales from the same timeframe last year, or calculate your average sales overall.
- Subtract your baseline sales from the actual sales made during the campaign period.
- The result is your sales lift, showing the additional revenue generated by the marketing campaign.
Keep in mind that sales lift doesn't pinpoint the campaign as the direct cause of the increase. However, it's a valuable insight into whether your ad campaign was a worthwhile investment when looking back at its performance.
ROI, or return on investment, is another key metric you should track alongside ROAS. This is partially because return on investment is very similar to ROAS.
In a nutshell, ROI tracks the monetary return (and thus, the overall performance) of many marketing efforts, such as email marketing, social media marketing, and online advertisements. ROAS, in contrast, measures the performance of one marketing campaign or ad type.
That said, ROI is still important to calculate and track over time. It’s an effective means to get a bird’s eye view of the quality and performance of your marketing efforts, especially in the long run. It's essentially the big-picture counterpart to ROAS.
Branded Search Volume
Lastly, consider tracking and analyzing branded search volume, also sometimes called branded search traffic. Your branded search volume is the total volume of traffic that comes to your website using branded keywords via search engines such as Google, Bing, and more.
“Branded” keywords are search queries that use or are directly associated with your brand, product names, or branded services. For example, say you run a shoe company whose name is “Company A.” A branded keyword might be “Company A sneakers.”
Branded search volume tracks the traffic you receive from brand-specific keywords from the most important search engines. It’s an important metric because it tracks how often visitors and potential customers come to your site using keywords directly related to or inclusive of your brand, versus generalized keywords that bring in organic traffic (such as "trendiest sneakers" instead of “Company A sneakers”).
The higher your branded search traffic is, the more likely your brand is growing in market dominance and recognition among your target audience members.
The Bottom Line on ROAS
Ultimately, a “good” ROAS depends on your industry, company size, profit margins, and the average cost per click you pay for online ads. Once you analyze each factor, you can calculate what a “good” ROAS looks like for your company specifically, then, adjust your marketing strategy appropriately to get as close to that ROAS as possible.
That’s much easier, of course, with Prismfly on your side. We offer services to solve a wide range of problems and help you scale business revenue across the board, including conversion rate optimization, UX and UI design, and much more.
Contact us today to see how we can help you maximize profits and conversion rate.