The end goal of any kind of advertising, whether online paid ads, SEO or other methods, is to generate revenues. But more importantly, generate a profit. You can have revenues without making a profit.
Therefore, metrics that tell you the health status of a campaign are the most important. One of those is ROAS – Return On Ad Spend. It is the same idea as ROI, Return On Investment.
This is easy to calculate when you have the proper data. Simply take the amount of revenues generated by the advertising campaign and divide it by the amount spent on that campaign. The number that results is a ratio that simply tells you that for each dollar you spent, you made so many dollars. There is no units. For instance, if revenues were $1000 and you spend $200, the ROAS is 5.
Obviously, if the number is less than one, you are not making money, you are in a deficit. A ROAS of 0.8 means you make only $0.80 for every dollar spent. You want that number above 1 and the higher the better.
Recently, I talked to a potential client where their ROAS is 1.6, which at least means they are not in the negative. Note that it doesn’t mean they are making a profit, ROAS doesn’t take into account the cost of the product nor any other costs which is what ROI does. But you can be sure that if ROAS is low, so will ROI be. It thus is a good metric, easily calculated, to gauge the effectiveness of a marketing campaign.
What is a good ROAS?
There is no one answer for all situations. You obviously want it as high as possible and to increase it. This can be done in a variety of ways on paid ad platforms, mainly to decrease the cost per click. On the website, you should try to increase the conversion rate of your landing pages.
A ROAS of 1.5 may be acceptable for high-ticket items. However, I have heard unreasonable expectations of clients wanting 10, 20, or even 100.
Another thing to keep in mind is the long-term value of a client. If, as in the case of my potential client, customers come back and buy over and over for a consumable product, a ROAS of 2 can be acceptable.
Many advertisers, especially new ones, tend to focus on the wrong metrics and by doing so, manage their campaigns in the wrong way. For example, reducing the bid but not doing the things that lead to lower CPCs and higher conversions. They tend to think that doing so leads to higher ROAS, which it can but they put their efforts in the wrong places. The right change can dramatically increase your ROAS.
Pay attention to ROAS and the trend over time. It can point to a campaign going in the right or wrong direction more than most other metrics.
Lucid Web Marketing’s main goal is managing your campaigns to increase your ROAS on ad campaigns. Contact us.
Update: the potential client above has become a client. A week into revamping the campaign, their ROAS was 3.0, nearly double what it was before with room for improvement.