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 from 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 marketing metric that measures the amount of revenue you’re bringing in for every dollar you spend on advertising.
Sounds similar to ROI? That’s because it is. The only difference here is that ROAS measures performance for every dollar spent on a specific digital advertising channel, while ROI helps you to get an overall picture of your marketing return across all channels.
So how does ROAS measure the effectiveness of your marketing campaigns? Simple: the more effective your advertising, the more revenue you bring in. An ad that cuts through the noise and brings in more qualified traffic is likely to also bring in more sales, whereas a lacklustre ad won’t. The higher your ROAS is, the better. A high ROAS suggests that your ads are more effective; a low ROAS indicates there’s work to be done to optimize your campaigns.
The best part about ROAS? You can apply this metric to get data-driven insights at the campaign, ad groups and keyword levels. It’s a great metric for eCommerce companies and other brands spending on online advertising platforms, so long as you have a way to track how much you’re spending on your ads and how much you’re earning from those same ads.
How to calculate ROAS
Now that we know what return on ad spend is, it’s time to calculate ROAS. Luckily, working out your ROAS is fairly straightforward, as long as you have your spending and earning data on hand.
Here’s a simple formula to calculate ROAS:
(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 you calculate ROAS, especially if you want a true indication of costs and profit margins:
Partner/vendor costs - any fees and commissions associated with partners and vendors on the campaign or channel level should be factored into your ROAS calculation.
Agency/ design costs - Did you pay someone to manage or create the ads? Add these costs in when you calculate ROAS to see a true picture of your return.
In-house resource costs - expenses such as salary and other related costs that contribute to your online marketing efforts.
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 when it comes to your marketing strategy.
Take this example:
Image credit: Search Engine Land
Using the table above, which online marketing 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 ad budgets and strategies that are based on real data.
CPA vs. ROAS: When to Use Which?
If you’ve dabbled at all in any kind of digital marketing channel, such as Google Ads or Facebook Ads, chances are you’ve used the cost-per-acquisition (CPA) metric. Cost-per-acquisition is another popular metric that’s used to work out the effectiveness of a paid advertising campaign.
CPA is calculated by dividing the total advertising dollars spent on search campaigns by the number of conversions it resulted in.
In this case, tracking conversions can include a number of actions: it might be a product purchase, an e-Book download, or a person who fills out your contact us form.
For example, if you spent $1,000 to promote your eBook and got 30 downloads from one paid search ad, your CPA would be $33.33. On the other hand, if you got 50 downloads with that same budget on another ad, your CPA would be $20. In this instance, it’s clear that the second ad is more effective at getting your target audience to convert.
Whether you're an eCommerce business or a B2B company, ROAS data and CPA data are both important in measuring the success of your digital marketing campaigns.
CPA is a great metric to use when you want to track how effective a campaign is at getting a user to take action. While revenue is the MO of any business, there are a ton of steps that your audience has to take before making a purchase with you: they might sign up to your newsletter, download an eBook, add an item to their cart, or fill out a form requesting a callback. CPA is a way to quantify these conversion values and track how much it costs to acquire a customer.
Meanwhile, ROAS measures the direct correlation between your advertising campaigns and the end goal — sales. If you have 100 eBook downloads but can’t track your revenue generated, you’re missing a HUGE piece of the puzzle when it comes to optimising your advertising efforts.
When it’s possible, track and optimise for both CPA and target ROAS. This will give you the best idea of how a specific ad campaign is performing on all accounts, from acquisition and conversion rate to your bottom line. However, if you have a top-of-funnel or middle-of-funnel campaign, it might make more sense to track and optimise for CPA over ROAS. In this brand awareness stage, your audience may only be in the initial phases of learning about your business and products or services. On the flipside, you should track ROAS for a retargeting or bottom-of-funnel campaign where the goal is leads or revenue generated.
What’s a good ROAS?
Calculating your ROAS is one thing, but you need to actually use it to work out which specific ad campaign is working and which one isn'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 your profit margin, business goals, operating expenses and more.
Some businesses might need a far higher ROAS to stay profitable, and others can kick goals at a 'lower' ROAS of just 3:1.
As a general rule of thumb for ROAS calculation:
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 = This is a good ROAS. Keep doing what you’re doing!
Optimise your Google Ads account for ROAS
ROAS can be used across a TON of digital marketing platforms, but most digital marketers use it for paid search. If you want to measure and optimise your return on ad spend in Google Ads or Shopping campaigns, you’ll need to understand how the Target ROAS strategy works and how to set it up as a goal.
Target ROAS in Google and how it works
To understand how Target ROAS works for Google Ads campaigns, 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 return on ad spend, 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 ROAS goal of 400%, it will adjust your bids to try to maximise your conversion value and reach the target return on ad spend.
Learn how to set up your target return on ad spend bidding in this Google Ads guide.
4 ways to improve your return on ad spend
The goal of tracking ROAS is to:
measure the effectiveness of your ad spend, and
optimise your digital advertising to bring in more revenue.
Once you know how to set up and track return on ad spend, it’s time to get on to the most important part: improving it. If you want to get more bang for your marketing buck, these four methods will help you achieve a good ROAS, maintain profitability, and maximise sales.
1. Review your attribution models
Before you start making changes to your ads, it’s a good idea to double and triple-check that you’re tracking ROAS accurately. The last thing you want to do is to ditch a high-performing campaign because you overlooked an important element, such as the number of offline sales you’re bringing in or indirect sales that are generated from your campaigns. Take a look at the data you’re using to calculate the metric: have you factored in all the costs and all the avenues where sales could be generated from an ad?
Another thing to look out for? Your attribution models in Google Analytics. Whether you use first-click attribution or last-click attribution makes a BIG difference in your return on ad spend. The wrong attribution model can significantly skew your data, making a marketing campaign look more or less successful than it actually is.
Take a look back over your campaigns and ensure you’re using the right attribution model for your campaign or goals. The ideal attribution model depends on a number of factors, such as your customer buying cycle, the number of touchpoints you have, your industry, product or service, and more.
2. Cut down on advertising costs
The math is simple. Lower your ad spend and maintain low advertising costs, increase your ROAS.
Let’s say one business is running a Google Ads campaign that costs $2,000 a month. Another is running an ad campaign that costs $3,000 a month. If both companies generate $10,000 in revenue from those campaigns, the one with the low advertising costs will have the higher ROAS.
Here are a few ways you can optimise your campaigns to spend less:
Improve your Quality Score. Ads with a higher quality score rank higher and have a lower CPC than those with a lower score. If you can boost the quality and relevance of your ads, you should see this reflected with less ad spend.
Turn off underperforming ads. If you have ads that consistently aren’t delivering the results you want, consider switching them off altogether. Alternatively, run A/B tests to see what works for your audience, then use these insights to cull any particular ad campaign that doesn't stack up.
Use negative keywords effectively. Make sure you’re excluding any keywords that aren’t relevant to your ad campaign, and that could be draining your budget.
Get laser-focused with targeting. Review your ads and see if there’s an opportunity to refine your target audience in future advertising efforts. For example, you might want to narrow down your audience’s geographical location, interests, or age range to ensure you’re reaching the right people
3. Explore ways to increase average order value
Another way to improve your ROAS? Increase your revenue. If you can maximise the amount that your ads are bringing in, you’ll naturally see an uplift in your ROAS.
First, take a look at your ad campaign. Are there opportunities to target new keywords that you may have missed previously, or that have less competition? If so, it’s worth investing in these as your ads will have a chance to gain more clicks.
At the same time, look for new ways to increase your average order value across the customer journey (this is particularly handy for eCommerce companies). This could be through incentivising customers to spend more by offering free shipping once they reach a minimum order amount, or providing them with recommendations of products that are often purchased together.
4. Look beyond your ads
Sometimes, the ads themselves aren’t the culprit. A low ROAS could be caused by other problems, such as:
A lengthy sales process that leads customers to drop off along the funnel.
A landing page that isn't designed in line with best practices.
Pricing or promotional issues.
If you’ve done everything you can to optimise your ad campaign but you’re still not seeing the impact on your bottom line, consider reviewing these as part of your efforts to improve ROAS. Ensure that your landing pages are always designed in line with best-practice and A/B test these to optimise them for conversions. At the same time, make sure to regularly review your checkout process to ensure it’s as smooth as possible for your potential customers.
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.