What is Return On Ad Spend (ROAS) and how to calculate it?
The efficiency of your advertising campaigns plays a significant part in your online success: if you can catch the attention of your prospects, quickly inform them of your product or service, and lead them to conversion: your revenues increase, you can invest, and the growth cycle continues. But how can you be sure your ad campaigns are effective, and can you measure that effectiveness? In this guide, we examine a key metric that answers these questions: return on advertising spend (ROAS). And we will show you how to increase it, too.
Beyond organic online marketing, paid advertising campaigns offer a reliable method for gathering new leads, making consumers aware of your offering, and leading them to your e-commerce shop. When analysing the effectiveness of your advertisements, there are many metrics you can use, including:
- Return on investment (ROI)
- Click-through rate (CTR)
- Cost per conversion (CPC)
- Amount of clicks
- Paid website traffic
While each of these metrics has value, the best way to truly understand the efficiency of a specific ad or campaign is return on advertising spend (ROAS).
What is Return On Ad Spend (ROAS)?
Simply put, return on advertising spend (ROAS) is the profit you gain from each euro, dollar, or pound you spend on advertising. Your ROAS score offers you a simple way of analysing the performance of a given advert in clear financial terms. In other words, it shows you how much you get from the money you put into your advertising.
How do I calculate ROAS?
To work out the ROAS for any advertising campaign, you need to know two values:
- the revenue you received directly from your advertisement
- the money you spent on the ad or campaign.
Then, you take the revenue and divide it by the money spent. The resulting number shows you the amount of money you gain from every single unit put in, like one dollar, euro, or pound. Here is the ROAS formula:
Revenue (€ / £ / $) / Ad spend (€ / £ / $)= Return on ad spend
For example, if you spent €1,000 on an ad campaign and made €2,000 in revenues, you would use this formula to give you a ROAS of 2:
Revenue (€2,000) / Ad spend (€1,000) = ROAS of 2 (or 2x, 200%, 2:1, or €2)
The above shows that you make two times as much profit as a result of each unit of currency you put into your advertising. The ROAS score can be expressed as a multiplier (2x), a percentage (200%), a ratio (2:1), or a currency amount (€2).
Why is ROAS important?
ROAS gives you insight into the financial side of your adverts. If your ads are of lower quality and are overlooked by your prospects, you will probably have a low ROAS score. This can indicate that you need to improve your ad campaign or stop it entirely, as it might not be worth what you are investing in it. A higher ROAS score shows that your advert is effective and offers a strong return on your initial investment. And a successful effort can be further optimised: you may be able to use your ad across new channels or use A/B testing to enhance its performance further.
Overall, ROAS lets you see the effectiveness and quality of your adverts and shows you where you need to improve. It can help you avoid unnecessary ad spending or increase the revenue from a particular campaign. It is important to note that ROAS only gives you data for a specific ad campaign: it cannot tell you about the profitability of your products or company.
3 tips to increase your return on ad spend (ROAS)
With the ROAS formula, you have two simple ways of upgrading the financial efficiency of your advertising: either increase the ad revenue through higher quality ads or reduce your ad spend. Here are three additional tips for increasing and improving your ROAS:
1. Improve your ad content
By continually fine-tuning your advertising copy and visuals, you can make sure you are engaging your audience and showing them the actual value of your product or service. All of this while trying to convert them or tempt them to find out more about your company. From a detailed approach with A/B testing to simply rewriting and redesigning an entire campaign from scratch, turning more prospects into converts is a clear method of improving your ROAS.
2. Optimize every part of your campaign strategy
For paid advertising campaigns, adjusting the details can help improve your ROAS. By taking steps like focusing your budget on a particular market segment or adding more negative keywords so you can exclude irrelevant search terms from your campaign, you can reduce wasted ad spending. As for increasing ad revenue, there are many ways to do that. For example, you can boost your conversion rate by reducing the steps needed to complete a purchase in your store, making sure the route is clear.
3. Invest in marketing automation solutions
One sure-fire way of increasing your ad revenue is to adopt marketing automation and data-driven personalization tools. By using the data you collect to offer your prospects personalised adverts, you can increase the relevance and quality of your ads, leading to a higher ROAS. With personalization tools like Spotler Activate’s personalised advertisements, you can ensure that you meet your customers’ wants and needs while reducing waste spending by targeting well-defined market segments. This will help you raise awareness, increase brand exposure, and convert prospects efficiently.
With return on ad spend (ROAS), you have a simple metric for understanding the performance of your online ads and how, where, and when you need to improve. Your ROAS score can help you plan your next steps, from putting more capital into your successful ads, or creating a new, optimised campaign to reach your audience and increase your revenue fully. Whatever your current situation, adopting future-proof marketing tools like personalised advertisements and tailored customer journeys allows you to take your ad campaigns to the next level. And with this, you can increase your ROAS, reach new markets, and grow your online business.
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