Given the fiercely competitive eCommerce industry, if you’ve just embarked on your selling journey, running ads is a must, not a plus. And to run ads in the most cost-efficient ways, you must track your Return On Ad Spend (ROAS).
By calculating your ROAS properly, you’ll have a clear picture of your performance marketing – whether you’re on the right track and investing in the right ad channel or not.
So, in this article, we’ll show you everything you need to know about Return on Ad Spend, from definition, formula, benchmarks, and tips to improve your ROAS!
Let’s dive right in!
How to calculate Return On Ad Spend?
Return On Advertising Spend (ROAS) is a marketing indicator that gauges the success of your digital advertising campaigns. The formula to calculate ROAS metric is simple as shown below:
Formula: ROAS (%) = (Gross Revenue From Ad Campaign / Costs for Ad Campaign) * 100%
For instance, if you invest $5,000 for a Google ad campaign, and after 1 month, you convert total sales of $10,000, your ROAS for that month would be $10,000 / $5,000 = 2:1. And is 2:1 ratio is a good ROAS? Well, it depends – which we’ll discuss later below!
How to decide which ad channels get the most credit?
Most brands run ad campaigns on as many channels as they can to maximize their reach and meet their customers at every touch point, increasing their chances of converting.
And here comes the tough part – calculating ROAS for all the ad channels that you’re actively running. It means you have to attribute ad revenue to your ad channels properly, and there are actually various methods to do so.
Take a clothing brand, for instance, this company runs 2 ad campaigns during BFCM – Facebook ads and Google shopping ads simultaneously.
- When a target audience sees the brand’s T-shirt ad on Facebook, they scrolled through it.
- A couple of hours later, they suddenly remember having to attend a wedding next week so they want to buy a new T-shirt.
- They go to Google, search for ‘T-shirt” and see your ads. They remember you – so they click on the Google ads and buy your product.
If you use the last-touch attribution – you credit the last touchpoint of a customer’s buying journey for their end conversion. In the example above, you give all the credit to the Google ads, ignoring the fact that it’s the Facebook ads that remind the customer of your brand.
On the opposite, if you’re using the first-touch attribution, you give all the credit to your top-funnel ad efforts – the Facebook ads in this case, even though it’s the Google ads that help you close a deal.
That’s why multi-touch attribution is a preferred method because it gives credit to all the touchpoints.
Why is tracking Return On Ad Spend important?
ROAS is crucial for quantitatively assessing the effectiveness of advertising campaigns and how they affect an online retailer’s bottom line. When combined with customer lifetime value, insights from ROAS across all campaigns guide future spending, strategy, and overall marketing direction.
Monitoring Return on Ad Spending (ROAS) allows e-commerce businesses to make smarter advertising investments and improve overall efficiency.
What is a good ROAS for eCommerce?
Because ROAS is just an indicator to measure how efficient your ad performance is and there are lots of other marketing initiatives.
That means whether a ROAS is good or not depends on many other metrics – profit margins, customer lifetime value, and the overall financial health of your business.
Though there’s no right answer, an average ROAS is 4:1. For bootstrapping start-ups, a good ROAS therefore must be higher than 4:1. Meanwhile, for long-established firms with a thick profit margin, a bit lower ROAS at 3:1 is still fine, it just means that they want to invest more in performance marketing.
However, since ROAS only calculates how much money a customer brings you for their first purchase. While in fact, many of your customers will return if you offer them good products at good prices.
Therefore, a low ROAS doesn’t necessarily mean that you should give up on your ad campaigns. As long as you have a healthy LTV:CAC ratio, a bit low ROAS isn’t that big of a deal.
What is the difference between ROAS vs ROI?
While Return On Ad Spend (ROAS) is a metric used to indicate how effective an ad campaign is, Return On Investment (ROI) tells you the bigger picture.
Specifically, ROI is used to measure how effective your overall marketing campaign is (hiring an SEO agency, freelanced bloggers, etc.) not just performance marketing aspects.
Formula: ROI (%) = (Net Profit / Net Investment) * 100%
Since ROAS and ROI look at different aspects of investments – just because a company has a good ROAS doesn’t inherently mean it has a good ROI too.
How to improve your Return on Ad Spend?
Now that you know what ROAS is and what story this crucial metric tells, let’s discover some no-brainer ways to boost your ROAS!
#1. Constantly optimize your ads
Needless to say, if you want to achieve a healthy Return On Ad Spend, you need to constantly optimize your ad materials. This includes your title, call-to-action, and banner or video.
And by constantly optimizing your ad materials, we mean you have to A/B test your ads to see which ones are higher performing so that you can stick with them for your upcoming ad campaigns.
However, be noted that you should test only one element at a time. Because if you deliver to your target audience 2 completely different ads when one has higher conversions, you won’t know it’s because of the copy, the CTA, or the banner.
#2. Target long-tail keywords
One of the most cost-effective ways to improve your return on ad spend is trying to rank on relevant long-tail keywords. Even though these keywords have lower search volumes compared to the 2-3-word ones, people who perform a long search query are those with the highest buying intention.
For instance, if you sell footwear, try ranking a long-tail keyword such as “comfortable black cotton running sneakers for girls” instead of “female running shoes”.
|💡 Read more: Winning Google Shopping Ads Optimization Checklist 2023|
#3. Make your landing pages sale-driven
If you have a high Click Through Rate (CTR) but see no positive results in your conversions, the first thing you should do to improve your ROAS is optimizing the landing page where you direct visitors.
A few things you should consider to optimize your landing page:
- Highlight the main benefits of your products instead of going on and on about your products’ characteristics.
- Give your customers discount offers such as a Frequently Bought Together section to incentivize them to buy more & save more.
- Enhance trust for your landing page by adding customer reviews.
It’s time to improve your Return On Ad Spend!
All in all, Return On Ad Spend is an important metric that you need to closely monitor to have a better understanding of your ad performance. However, to have a big picture of your business’s overall performance, you need to track your ROAS alongside many other metrics as well.
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