In a sea of buzzwords and marketing statistics, ROAS (return on ad spend) is everywhere as the new way to measure how your business or brand performs based on their advertising spending.
But what exactly is the meaning of ROAS?
It’s deceptively simple: If you generate $100 for every $10 spent on an advertising campaign, it means your ROAS for that campaign is 10x, or, 10:1.
Unlike ROI (Return on investment), ROAS is specific to a campaign or product, not your overall business, so it’s portable (you can apply it to partnered campaigns, for example) and it’s scalable (multiple product lines can track their own performance apart from the entire department, or campaigns can take on vendors or partners as needed), making it a particularly powerful metric to improve performance on the fly.
While similar, Return on investment (ROI) is the total return of an overall investment, such as upgrading your sales systems, buying new equipment or, yes, hiring an agency for marketing. ROAS only demonstrates the success of a specific campaign. This means that the only cost considered in a ROAS calculation is the cost of advertising, not staffing, equipment or other overhead. However, the entire project’s budget, or campaigns, will be considered in an ROI calculation.
ROAS is a high level metric, not a catch-all, so you’ll still need to keep an eye on traditional metrics like click through rates (CTR), reach or conversions (CPC) to get an overall view of your campaign. At Abacus, we know the importance of calculating the right metrics to build a holistic view of what’s connecting and what’s not, so don’t lose sight of your overall ROAS with too many granular statistics.
By tracking ROAS performance for each campaign, you can improve your efficiency and build better 1:1 connections with your audience, rather than “seeing what sticks” after it’s too late. With solid ROAS calculations you can also prove definitive results from your efforts as marketers when launching a new campaign, or product, or partnering with a new advertising agency, and you can double down on what’s working with more precision than before.
And while ROAS is essential for understanding conversions, calculating things like brand lift can be much more confusing, and if you’re a content marketer, the long-tail discovery process can be much more difficult to track than a Shopify cart completion.
Like all businesses, the goal of your campaigns is to generate a positive result on your ad spend. When you’re working with your marketing team or with an advertising agency on strategy, it’s important to calculate both the hard data of clicks and conversions with the sentiment of social media and customer feedback to achieve that holistic overview that creates a sustainable growth engine over time.
But how do we discover our ROAS?
Time for a math lesson! But don’t worry, the ROAS calculation is actually very simple:
Revenue Generated by Ads / Cost of Ads
With this equation, you’ll get a multiplier (or ratio) to show how effective your campaign is at driving revenue. Easy, right?
Yes…but hold on: While the equation seems simple (just two numbers!) it can be deceptively tricky. Calculating the cost of an ad isn’t always as easy as the cost of the ad placement: a good marketer will consider the cost of the ad bid, the labour cost or vendor costs for the time it took to create the creative assets, stock photo or music licensing, legal costs, commissions and other factors. These can all skew your ROAS calculations.
If your marketing data isn’t accurate, your ROAS won’t be either: so it’s essential to calculate every step of the campaign process for success. If your business isn’t D2C / Ecommerce driven, you’ll need a solid strategy to track the long-term lead and sales funnel and how it feeds back into your final ROAS.
For example: An e-commerce company that spends $5 for every $20 of sales achieves a WORSE ROAS than a consulting company that spends $20,000 for a $100,000 client, but the latter may scare marketers off as too expensive to try without solid data to back it up.
While there’s no “golden rule” for ROAS performance, typically a 3x (or 3:1) ROAS is the bare minimum to be sustainable in the long run. If you’re breaking even on a marketing campaign or, even worse, losing traction, it may be time to consider a few factors that could be harming your performance, such as:
While each of these factors are important, again it’s critical to consider the long-term connections you’re building online with your audience when tracking metrics: lead generation and prospecting campaigns, or, launching a new brand may have a higher initial cost that can stabilize over time … so don’t panic!
Yes: ROAS is an important metric to track, but like all numbers it cannot be calculated alone at sea: It’s important to look at other data and metrics to get the full picture of what’s raising the tide on your overall sales, one campaign may be driving incredible brand awareness for sales of another product line but suffering on it’s own, so never market on an island. ROAS helps you evaluate the effectiveness of your advertising and marketing efforts more effectively when combined with things like customer lifetime value (CLV), not apart from it.
If your ROAS is sinking there’s a world of tactics to take to help right the ship, but four key areas can help save your sales:
Sell better: Is your website stuck in the past? Do customers sail through checkout or are they lost looking for products? Are customers abandoning carts or waiting for annual sales before buying? Your website is an incredibly important part of your business and there’s a lot to be done “at home” to improve your ROAS. Start with the design: are you mobile friendly, accessible and modern? Adjust your pricing by offering a discount for a 2nd item. Add a chat bot to answer common questions or go mobile and make shopping on Instagram or TikTok a priority to reduce friction for conversions. There’s a number of ways to improve your ROAS outside of advertising.
Spend less on ads: simple right? Well, not really: you may be bidding on the wrong type of ads, or ads on the wrong channels, or at the wrong time, or with the wrong conversion event…you get the picture. A performance specialist or agency partner can help review your ad account (called an audit) and help suggest ways to bid better and spend less to get results. (Want to book a free ad account audit with Abacus? Click here)
Make better ads: you might be doing everything technically right when it comes to buying ads for your business, but sales are still suffering. Why? At Abacus we’ve proven that creative is the #1 driver of ad performance, so you may need a fresh look for your brand to help stop thumbs and create connections. You’ll need to create captivating, full frame visuals to compete in the modern mobile landscape, not just cut and paste past campaigns and expect a sustainable ROAS.
Make MORE Ads. Wait what? This one seems counter intuitive, but in reality it’s more effective than you think. When your brand creates content that scales from the beginning, you can experiment with multiple visual styles, placements or audiences for the same cost of a single traditional “TV” style campaign and quickly see what is effective and what is not, calculating what creative is connecting and what needs to be “switched off”.
Unlike one monolithic, 30 second ad that’s inflexible and expensive, multiple ads can be created for multiple devices, sizes, lengths and customer touch-points, allowing you to achieve a better ROAS on individual campaigns and discover what is working with greater speed and less waste.
Still looking for clarity when it comes to ROAS? Let’s talk.