Running ads? Are you accurately measuring the success of your ads?
It’s crucial to align your KPIs with the goals of the ads. For instance, if you’re aiming to increase brand recognition, focusing solely on conversion rates isn’t ideal. Conversely, if you’re operating an e-commerce business and running sales ads, tracking the conversion rate is critical.
This brings me to the focal point of this article: Return on Ad Spend (ROAS). ROAS is a key performance metric that merits close attention. Recently I was bombarded with an ad for a marketing agency that was so proud to reach ROAS of 3 for their clients, but does business owners know what should they expect?
If you own a business and you are thinking about running ads, then this article is for you!
What is ROAS?
ROAS is a metric that measures the revenue generated by a business from its advertising efforts, divided by the cost of those efforts. The formula for calculating ROAS is simple:
ROAS = Revenue generated from advertising / Cost of advertising
For example, if a business spends $1 on advertising and generates $5 in revenue, the ROAS would be 5. This means that for every dollar spent on advertising, the business generated five dollars in revenue.
Why is ROAS important?
ROAS is important for several reasons.
- First and foremost, it allows businesses to evaluate the effectiveness of their advertising campaigns. By tracking ROAS over time, businesses can identify which campaigns are generating the most revenue and adjust their advertising strategies accordingly.
- ROAS also provides insights into the profitability of advertising efforts. If a business is spending more on advertising than it is generating in revenue, the advertising campaign is not profitable. By tracking ROAS, businesses can ensure that their advertising efforts are generating a positive return on investment.
Finally, ROAS can help businesses make data-driven decisions about their advertising budgets. By focusing on campaigns with the highest ROAS, businesses can maximize their advertising dollars and generate the greatest possible return on investment.
How to improve ROAS
Improving ROAS requires a multifaceted approach that takes into account a variety of factors. Here are some strategies that businesses can use to improve their ROAS:
- Target the right audience: Advertising to the wrong audience can be a waste of money. By identifying the target audience for a product or service and tailoring advertising efforts accordingly, businesses can increase the likelihood of generating revenue from advertising.
- Use the right channels: Different advertising channels work better for different products and services. By experimenting with different channels and tracking ROAS, businesses can identify which channels are most effective for their particular needs.
- Optimize ad content: The content of an advertisement can have a big impact on its effectiveness. By testing different ad content and tracking ROAS, businesses can identify the content that resonates best with their target audience.
- Monitor performance: Regularly monitoring ROAS and adjusting advertising strategies accordingly is crucial for improving ROAS over time. By analyzing data and making data-driven decisions, businesses can optimize their advertising efforts for maximum ROI.
ROAS benchmarks by industry and platform
It’s important to note that the ideal ROAS can vary based on your specific business goals, profit margins, and customer lifetime value. For example, if your profit margins are lower, you may need a higher ROAS to achieve profitability. Additionally, if you have a high customer lifetime value, you may be willing to invest more in advertising to acquire new customers.
These benchmarks are not definitive and can vary based on many factors, such as product pricing, customer lifetime value, and advertising strategy. It’s important to track your own performance and set realistic goals based on your specific business objectives.