What Is a Good ROAS in Marketing?
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Pathlabs Marketing |
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June 27, 2023 |
ROAS (Return on Ad Spend) is a vital metric in digital marketing that measures the effectiveness and profitability of advertising and marketing campaigns. This blog will provide a comprehensive overview of ROAS, its importance as a performance metric, how to calculate it, factors that affect it, and its distinction from ROI (Return on Investment).
What Is ROAS?
Return on Ad Spend (ROAS) refers to the amount of revenue generated compared to the advertising costs for a campaign. In simpler terms, it is the amount of money the marketer makes compared to the amount of budget they spend on advertising.
Calculating ROAS is simple: divide the revenue by the advertising costs.
Despite being a simple calculation, this metric has helped marketers determine the effectiveness of their advertising investments and assess if additional spending will yield proportional results.
“ROAS is a metric commonly used by marketers and brands to determine how many sales were driven from users that were targeted by their paid digital media.
To visualize, if we spent $5k on serving media, and from those users they purchased $10k worth of product, the return on ad spend would be 200%.”
But ROAS can be a challenge, especially with multi-channel marketing campaigns. Because ROAS can vary by channel, but the buyer’s journey may cross multiple channels, marketers today must be diligent with their analytics and tracking. Intelligent analytics suites can make it easier for marketers to track their ROAS, especially across multiple platforms and multiple advertising strategies.
The Importance of ROAS as a Performance Metric
ROAS is a powerful metric because it helps marketers understand and validate which ad formats, channels, and ad spend prices to choose.
For example, suppose a marketer sees that their programmatic video ROAS in one channel is getting them $2 on the dollar, while native ads can get their competitors $5 on the dollar. In that case, they may consider transferring more budget to native.
The previous example is one of many that show how upon reviewing ROAS, marketers can marginally change and modify their advertising choices to get better returns on ad spend.
“In marketing, there’s often an inflection point. If you spend $10,000, you might get $100,000 in sales. But if you spend $20,000, you might anticipate getting $200,000 in sales but only yield $150,000 – due to market saturation.
Your ROAS will tell you if more money is still yielding you more results and when the amount of money spent on marketing is no longer effective.”
What Is a Good ROAS?
There is no universal standard for a good ROAS as it varies across industries and platforms. The price, quality, and sales cycle for the service or product sold can also impact the overall ROAS result.
For example, the average ROAS on Facebook is between 600% and 1,000%. That’s very good — most people have good results when dealing with Facebook advertising. Comparatively, the average ROAS on Google Ads is 200%. So, we can see right off the bat that the average ROAS on Facebook is subjectively better.
Whether a ROAS is good or bad depends on the marketer's perspective and how much they want to maximize each dollar they spend. A given ROAS may seem incredible to some, while others may see it as marginal.
Instead of getting too hung up on the ratio numbers and trying to increase the dollar discrepancy, prioritize successful ROAS optimization incrementally.
This involves accepting where the ROAS is, monitoring performance trends, and aiming for consistent improvement.
An Advertising Intelligence platform can help you easily collect and analyze information while also performing ROAS optimization for you.
Advertising Intelligence platforms make it easier to automate the process of advertising — and thereby making it possible for marketers to focus more on their product and their broader strategies.
Understanding Good ROAS
How to Calculate ROAS
Marketers calculate ROAS by dividing revenue by advertising costs. In ratio format, we write it as revenue:cost.
Many marketers also consider ROAS as the yield on every dollar they spend.
For instance, if a marketing team spends $100 on advertising and it results in $10,000 in revenue, their ROAS would be 1,000%, or 100:1. This means that for every dollar they spend, they get $100 in revenue.
As you can see, it’s not that hard to calculate ROAS. The bigger challenge is making sure that the number is valuable. For instance, you might have three different advertising campaigns going. How do you know which one is contributing to your income? If you’ve launched multiple strategies at once and seen gains, how do you know what is or isn’t working?
That’s where split-testing usually comes in, where you target different audiences with different methods and determine which one has the highest ROAS. It’s important to ensure that your numbers aren’t just accurate but actionable; if you have numbers that aren’t tethered properly to your strategy, they won’t be helpful.
Why ROAS Varies by Industry
Different industries have varying ad spend and consumer demand dynamics. For example, the personal care industry (lotions, toothpaste, baby powder) benefits from high consumer demand, which may result in less need for advertising investment.
In contrast, the film industry heavily relies on advertising to attract audiences and drive box office success.
The moral of the story here is that marketing teams have different advantages and disadvantages regarding spending their ad budget.
Therefore, a company in the personal care industry may find astronomic luck with a 6:1 ratio, paying little on advertising and getting significant results. Or, they may find themselves in an industry like film, where teams risk spending huge budgets only for a 2:1 return. Even just getting to a 1:1 ROAS for teams is a challenge – they must invest heavily in marketing before they can even start to get a positive return.
Setting ROAS Goals Based on Business Objectives
To establish ROAS goals based on business objectives, teams must clearly understand these objectives in the first place. What specific actions do they want customers to take? Why is it essential to run this campaign? Who is the target audience? How much do they spend?
Once the objectives are defined, the team should determine a baseline ROAS to assess their ad spending and revenue. This baseline serves as a reference point for optimization efforts going forward.
Marketers can calculate the baseline ROAS using the team's current and historical data. If such data is unavailable, they can either set an arbitrary ROAS or conduct an initial round of campaigns to gather baseline data.
After obtaining the baseline ROAS, the team should compare it to the desired business objectives, thinking about ways to improve it. They may realize they want broader reach, to make more revenue on specific campaigns, etc.
In effect, they will experiment with new channels and formats, increase ad spend on particular campaigns, or even reduce it.
The team should then record the results, recalculate the ROAS, and compare it to the business objectives. Do you see the cycle? Overall, the marketer is looking at business objectives, comparing them to the baseline ROAS, experimenting, optimizing, and repeat.
Factors that Affect ROAS
Ad Targeting and Audience
ROAS ratios may be low for marketers because they need a better understanding of their target audience persona. They may also incorrectly input and tag demographic parameters and behavior-based targeting in programmatic platforms.
Marketers won’t have the revenue to calculate a ROAS if they don't target the right audience.
Ad Creatives
The quality and relevance of ad creatives play a crucial role in attracting attention, engaging users, and driving conversions. Compelling visuals, persuasive messaging, and effective calls-to-action can positively impact ROAS.
If ads look good, users will bite.
Ad Placement
The placement of ads within different platforms, websites, or media channels can influence their visibility, reach, and engagement. Strategic ad placement in appropriate and high-converting locations can contribute to better ROAS.
The right time and place matters.
Landing Page Experience
The user experience on marketers’ landing pages after clicking on an ad is critical. A well-designed and optimized landing page that aligns with the ad's messaging and offers a seamless user experience can improve conversions and ROAS.
If it is hard to navigate the page, users will bounce.
Competition and Industry Benchmarks
The competitive landscape and industry benchmarks can provide insights into how your ROAS compares to others in your industry. Monitoring and analyzing competitors' strategies and benchmarking against industry standards can help identify areas for improvement. Finding this data isn’t hard either. It can take just a few Google searches
Strategies to Maximize Return on Ad Spend'
Know the Limits of ROAS
“It’s important to point out the downside of using ROAS in measuring campaign performance through and through. While not alone, one of the biggest threats to its validity is the effect returning customers have on ROAS.
If a campaign is targeting and/or optimizing towards users who would purchase a brand’s product(s) regardless of being served with their ad or not, this can inflate ROAS performance. Because ROAS doesn’t account for a user’s already established relationship with a brand (or lack thereof), this can mislead campaign optimizations, insight reporting, and our understanding of the media’s true impact on a user’s purchase propensity.”
Optimize Ad Targeting and Audience
Refine targeting parameters, segment audiences, and leverage data-driven insights to reach the most relevant users. In addition, test and optimize the audience targeting to improve ROAS.
Always Consider Attribution
Many marketers use integrated campaign methods by placing ads and content across multiple channels and touchpoints; this, however, confounds the ROAS and makes it challenging to attribute traffic.
Consider a scenario where a marketing team spends $400 on search advertising and $600 on display advertising to drive traffic to their home page. They observe $5,000 in revenue but are unsure about the specific contribution of each method in driving that traffic.
To address this, the marketer needs to find a way to track this traffic and attribute the touchpoints that ultimately pushed them to the page. They can do so by using tracking applications and extensions or even programmatic platforms that allow particular tagging and attribution modeling.
With this information, marketers can evaluate the effectiveness of each channel. For example, they may discover that display advertising contributes more to revenue and delivers a better ROAS than search advertising, causing a reallocation in the budget to save money and promote future ROAS results.
Test and Refine Ad Creatives
Conduct A/B testing of ad creatives, messaging, and visuals to identify the most effective combinations. Regularly analyze performance metrics and refine ad creatives based on audience preferences and engagement.
Optimize Ad Placement and Bidding
Continuously monitor and optimize ad placements and bidding strategies. Identify high-performing placements and allocate more budget to them while adjusting bids based on performance data to maximize ROAS.
Improve Landing Page Experience
Optimize landing pages for better user experience and conversions. Ensure fast loading times, clear and compelling messaging, intuitive navigation, and prominent calls-to-action to push the user down the funnel.
Monitor and Adjust Campaigns Regularly
Regularly review and analyze campaign performance metrics, such as click-through rates, conversion rates, and ROAS. Use the insights gained to make data-driven adjustments and optimize ad campaigns for better results.
How Is ROAS Different from ROI?
ROAS (Return on Ad Spend) and ROI (Return on Investment) are closely related metrics used in marketing, but they measure different aspects of advertising effectiveness. ROAS focuses solely on the direct costs associated with advertising, calculating the return generated from these expenses. In contrast, ROI provides a broader perspective by including all related costs, not just advertising expenses, such as labor and administrative costs. This makes ROI a more comprehensive measure of overall profitability.
While ROAS offers a more targeted insight into the efficiency of advertising spend, ROI gives marketers a wider view of their investment's overall return. It's beneficial for marketers to consider both metrics to gain a complete understanding of their advertising's performance. Many programmatic platforms available to marketers can supply both ROAS and ROI data, aiding in more precise analytics across all channels.
Understanding the distinction between these two metrics is crucial. ROAS zooms in on the money spent on advertising platforms, while ROI encompasses a broader range of expenses, offering insights into the total profitability of marketing efforts. Marketers might use ROAS for a detailed analysis of advertising spend efficiency, whereas ROI helps in assessing the comprehensive value gained from marketing investments.
Future of ROAS
“Despite the inherent issues with ROAS, platforms are continuously releasing new features to address the ROAS challenges. For instance, Walmart DSP recently provided data on the percentage breakdown of new users versus repeat purchasers, enabling marketers to employ more effective tactics for leveraging new user growth. With access to unparalleled user data in Walmart Connect, marketers can optimize their strategies based on user spending and purchase frequency compared to others.
In addition to platform advancements, the industry is witnessing the emergence of incremental ROAS reporting as a new standard in measuring sales-related outcomes. Unlike traditional ROAS, incremental ROAS measures sales generated by users exposed to the brand’s paid media, revolutionizing the retail and related media sectors. Both Kroger and Walmart have introduced beta reporting for incremental ROAS, signifying a shift in measurement methodologies.
Thanks to enhanced data accessibility, improved platform capabilities, and heightened competition in the retail sector, the industry is progressing toward more accurate sales optimization. Despite its limitations, ROAS offers valuable insights that surpass many other mid-upper funnel metrics like CTR, making it a preferred choice for assessing campaign success.”
In Conclusion…
As we end, let’s address the elephant in the room: we marketers don’t always love math and science. However, math makes a ROAS formula go around.
So, we encourage all marketers to push themselves to explore the cool metrics that can truly add some additional intuition into campaigns, like ROAS.
Who knew that just dividing campaign revenue by advertising costs could shed light on whether a team should stick with their current strategy or change it up?
