If you want your business to be successful and ultimately to grow, you need it to make a profit. This might seem like we’re forcing you to go back over the basics, but you’d be surprised by how many businesses seem to forget this.
Of course, actually making a profit can be easier said than done, and you also need to know how to measure it. There are many metrics that you should be keeping an eye on to make sure that your company is turning a healthy profit, and ROAS is one of the most important because it gives you valuable insights into what’s working and what isn’t.
What is ROAS?
The first and most obvious question to ask here is, “What is ROAS and how does it fit into a lead generation strategy?”
If you’ve spent any amount of time in and around the advertising industry then you’ve probably heard the term “ROI”. Short for “return on investment”, it essentially refers to the money that you get back for any given investment.
ROAS is kind of like a more specific form of return on investment. Short for “return on ad spend”, it refers exclusively to the profit that you made from running paid advertisements. That means that if you’re using digital advertising as one of your primary digital marketing strategies, you should be monitoring ROAS and comparing it to other forms of marketing to see if advertising even makes sense for you.
One of the advantages of looking at return on ad spend is that you can evaluate your advertisements at a much more granular level. You might track your ROI for your overall ad campaign, but you can dig down and look at the ROAS for individual ads and ad groups. This will then allow you to make more targeted changes to improve your return on ad spend – which will then have a knock-on effect and improve your ROI.
This makes your ROAS an important aspect of any growth marketing strategy, as well as one of the half dozen or so most important metrics that you’ll want to track over time. It’s valuable as both a short-term indicator of campaign health and as a long-term average to improve upon, and it’s a good idea to share a monthly update on the metric amongst marketing teams and senior management.
How do you calculate it?
Calculating your ROAS is pretty easy and if you’re used to calculating ROIs then you’re not going to have too much trouble as the two formulae are pretty similar:
RETURN ON INVESTMENT = Profit / investment * 100
RETURN ON AD SPEND = Profit / ad spend * 100
One hybrid approach to use with your ROAS is to replace profit with revenue and to divide your revenue by your ad spend. This can make the process simpler, but it can also put you at greater risk because you can end up with a positive ROAS while still losing money overall due to stocking costs and other overheads.
Why is this metric worth watching?
Your ROAS is specifically designed to give you a more granular level of control over how each of your advertisements is performing, and so it comes in handy when you’re trying to handle the nitty gritty of your day-to-day ad management.
In some cases, such as if you’re placing real-time bids or running programmatic advertising, you can use your ROAS to make super-fast decisions to turn off ads as soon as they’re no longer profitable.
Ultimately, having a more specific way to measure your advertisements’ performance than relying on a traditional ROI can help you to be more strategic with your marketing. Having this high level of detail when it comes to performance will make it easier for you to take benchmarks and ultimately to know how to develop and deploy campaigns in the future.
With that said, you shouldn’t make the mistake of only watching your ROAS. You’ll want to keep an eye on your ROI too, as well as other key metrics including:
- Customer Lifetime Value (CLV): Focusing too heavily on ROAS can lead you to neglect the fact that some customers are worth much more to you over time than they are based on their first purchase. CLV allows you to factor in their full lifetime as a customer.
- Conversion Rate (CR): If you have a low conversion rate then there’s a good chance you can dramatically improve your ROAS by running tests to boost your conversion rate.
- Ad Spend Growth (%): Tracking this can help you to see whether your ad campaigns are growing in size, scale and ambition month on month or year on year.
What’s a good ROAS?
This is one of those “how long’s a piece of string?” questions with no real answer. It can depend upon a huge variety of factors, from your business goals and your revenues to the industry you work in and even factors outside your control such as whether there’s a global pandemic going on.
With that said, as a general rule, we’d recommend aiming for a minimum ROAS of 3:1, because anything lower than this will almost always lead to a net loss in the end. This is especially true if you’re measuring your ROAS based on revenue as opposed to pure profit. You also have to bear in mind that your metrics can drop surprisingly quickly and so you’ll want to leave yourself a little profit leeway just in case something goes wrong.
But if you can, you should aim higher and do what you can to exceed this bare minimum, and the real truth is that the best way to approach your ROAS is to benchmark it at the start of any given campaign and then to do what you can to improve it over time. Instead of trying to compare your business and its performance to your competitors, you should focus on competing against yourself.
So the real answer to this question of what makes a good ROAS is that it’s all subjective. The true sign of a good ROAS is that it’s at a higher value than it was when you first launched your campaign.
How does ROAS work with Google Ads?
If you’re using ROAS as a key metric for your campaigns then you’ll be pleased to know that you can directly prioritize your ads for a high ROAS from within the Google Ads interface. You’re able to apply ROAS bidding across both individual ads and campaigns as well across an entire portfolio of advertisements, depending upon what best suits you and your use cases.
ROAS bidding taps into Google’s capability to run automated bidding, and while it does take a little bit of work up front to get the campaign set up and off the ground, it’s worth spending that time to get the software development kit (SDK) installed or to carry out any other technical tweaks that are needed. As a general rule, it’s not much more difficult to set up than conversion tracking, and if you speak to your web developer then they should be able to help you out.
Note that for ROAS bidding to work, your account will need access to a certain amount of pre-existing data, and many of the features are also currently still in beta. You’ll need to reach a minimum threshold for conversions in the past month or so if the ads are to run because you can’t optimize for return on ad spend if you’re yet to witness a return.
There are plenty of guides out there (as well as Google’s own documentation) that can walk you through the steps you need to follow to create an ROAS campaign, and we’re not going to cover it here because we don’t quite have the space and because the chances are that the precise steps will change soon enough.
For now, all you need to know is that not only can you monitor ROAS as an important metric showing the overall health of your campaigns, but also you can specifically optimize your ads for it. If you have the skills to be able to do it in house, fantastic – if not, you can always find an agency or an advertising specialist who can help you out.
Your analytical data is some of the most important information that your company has access to, and indeed entire companies can be built from the proprietary data that they collect and analyze. Just remember that data alone isn’t enough and that if you want to benefit from it, you’ll need to crunch the numbers and use what you learn to influence your digital marketing strategies.
Still struggling to wrap your head around analytics? Growth Marketing Genie can help you to create and track campaigns and to analyze the data to reveal the insights that will drive your company into the future.
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