Return On Advertising Spend (ROAS) is an essential marketing metric to judge the performance of digital ad campaigns and work out how to get the best return form your advertising dollars.
It measures how many dollars you get back for each dollar spent on digital advertising.
If you’re not already measuring ROAS for your online advertising campaigns, now is the time to start.
In this article, we’ll dive into what ROAS is, how to calculate it, and how to use Target ROAS in Google Ads.
Let’s dive in.
ROAS, or “return on ad spend”, is a ratio of the dollars you will receive for every dollar you spend on advertising.
Sounds similar to ROI? That’s because it is. But while return on investment gives you an overall picture of your marketing return, ROAS is more specific in measuring the performance of each advertising channel.
You can apply this metric at the campaign, ad group and keyword levels to get data-driven direction for your campaigns.
Many people refer to ROAS as an eCommerce metric, because the link between ad spend and ROAS is so direct. But it’s a great metric for any company spending on online advertising, so long as you take the time to set up tracking for the right metrics.
How to calculate ROAS
Here’s a simple formula:
(Revenue – Cost) / Cost = ROAS
For example, say you’re running Google Ad campaigns and want to know the return of individual PPC campaigns.
Take the total revenue generated by the Google AdWords campaign, subtract what you spent to run the ads, and divide the result by your ad spend.
There are a few things you should always include when calculating ROAS, especially if you want a true indication of costs:
Partner/vendor costs - any fees and commissions associated with partners and vendors on the campaign or channel level.
Agency/ design costs - Did you pay someone to manage or create the ads? Add these costs in to see a true picture of your return.
In-house resource costs - expenses such as salary and other related costs.
Clicks and impressions: Average cost per click, the total number of clicks, and other metrics.
Why you should use this metric
If you’re investing in digital ad campaigns, every dollar counts. But how do you know what’s working, how to improve and where to optimise the campaigns for better returns and less waste?
Tracking the click-through rate, cost per click and conversions only give you part of the story.
Take this example:
Image credit: Search Engine Land
Using the table above, which campaign would you invest more in?
Campaign 3 would be the obvious choice. It has the highest CTR and the lowest CPC.
But for the whole story, you need to measure ROAS.
Now you can see that Campaign 3 had the best click stats, but has a shocking sales rate (SR) and cost per sale (CPS).
Campaign 4, on the other hand, is smashing goals. It only has low click rates, but those clicks are translating to profitable sales.
Using this example, it’s easy to see how ROAS gives you a way to quantitatively evaluate the performance of ad campaigns and how they contribute to your bottom line.
When you use ROAS with other metrics, such as customer lifetime value (CLV), you can prepare future budgets and strategies that are based on real data.
What’s a good ROAS?
Calculating your ROAS is one thing, but you need to actually use it to work out which campaigns are working and which aren’t.
The fact is, a good ROAS for one company might not be good for the next.
It depends on all sorts of factors, such as profit margins, business goals, operating expenses and more.
Some businesses might need a far higher ROAS to stay profitable, and others can kick goals at just 3:1.
As a general rule of thumb:
Below 3:1 = Rethink your strategy as there’s a big opportunity
Around 4:1 = Use this as a benchmark, but aim to do better.
Above 5:1 = Keep doing what you’re doing!
Target ROAS in Google and how it works
To understand how Target ROAS works in Google Ads, first, you need to know the basics of Smart Bidding.
In Google Ads, you can choose to use Smart Bidding in ad auctions.
These are conversion-based bid strategies that use machine learning to optimise your ads for conversions or conversion value.
Smart Bidding factors in lots of auction-time signals, such as device, location, time of day, remarketing list, language and operating system, to capture the unique context of every search.
One strategy you can set up for Smart Bidding is Target ROAS.
By setting a target ROAS, you allow Google Ads to automatically optimise bids across keywords using machine learning to get more conversions within your performance target.
Here’s how it works:
You set up conversion tracking
Google Ads uses machine learning to predict future conversions and values using what you’ve reported through conversion tracking
Google Ads then sets maximum cost-per-click (CPC) bids to maximise your conversion value and achieve an average ROAS equal to your target. For example, if you set a target ROAS of 400%, it will adjust your bids to try to maximise your conversion value and reach the target ROAS.
Learn how to set up your target ROAS bidding in this Google Ads guide.
ROAS answers the fundamental digital marketing question, “If I put X amount of dollars into this channel, what will I get back out?”
This is critical, because at the end of the day every marketing activity is an investment. If an ad channel isn’t generating a profit, it isn’t worth your investment. If you’re not measuring your ROAS, now is the time to start.