Complete Guide to Return on Ad Spends

As performance marketers, we all spend a considerable amount of time measuring metrics like impressions, CTRs, CPCs, CPAs, and so on. While these are important, they are simple metrics that do not convey the bigger picture. Put simply; they do not tell you whether you are spending your advertising dollars as efficiently as possible.

This is why measuring ROAS or Return On Ad Spend becomes critical in performance marketing.

It gives you a comprehensive view of your ad spend efficiency and campaign effectiveness. In this post, we will understand what exactly ROAS is, along with some handy ROAS optimization techniques.

What is ROAS? 

On the web, you will find a myriad of definitions for ROAS. But ultimately, they all arrive at one simple meaning - “Revenue earned for every dollar spent on ads.” It is a widely used metric to measure campaign effectiveness and quantify the strategic success of advertising efforts. While ROAS might seem a very complex metric at first glance, calculating it is simpler than you think. Here is a simple formula to calculate the Return On Ad Spend -

Let us understand with an example. After running a campaign successfully, you are able to attribute $5000 of your revenue to ads. You spend $1000 to run the campaign. Then, your ROAS will be $5000/$1000 = 5:1. This means for every dollar you spend on advertising, you earn $5 in return, which is a great return.

In all respects, ROAS might seem very very similar to another metric you’ve probably heard a lot - ROI or Return On Investment. So, are they similar? Well, not really!

How is ROAS different from ROI?

There are a few major differences between these two seemingly similar terms. Broadly speaking, ROAS focuses on revenue while ROI revolves around profitability. So, ROAS measures the  returns for a specific ad campaign while ROI measures the overall returns on your campaign investment after considering operational expenditure. In short, if you:

Want to know whether your overall campaign is profitable for your business? Measure ROI

Want to know whether the ads are generating enough sales revenue? Measure ROAS

Ultimately, it is important to calculate both ROAS and ROI to understand whether your campaign investment has resulted in profitability and growth for your business.

Let us understand the difference between the two terms with the help of a simple example -

An online fashion store spends $1000 on a Google ad campaign. It results in $4000 in revenue for them. 

Here,

ROAS = $4000/$1000 = 4:1

Now, if the store is operating on a 10% margin, 

ROI = (($4000*10%)-$1000)/$1000 x 100 = -60%

While a ROAS of 4:1 seemed a good value at the first glance, only after calculating ROI do you realize that the campaign is actually generating a massive negative ROI. This can be attributed mainly to the narrow margin.

What constitutes a "good" ROAS?

Short answer - “There is no right value”. A good (or bad) ROAS completely depends on the industry, type of business, or even advertising platform.  For instance, a good ROAS for eCommerce businesses hovers around 1.1 to 3:1. But for a SaaS business, a good ROAS ranges between 3:1 to 8:1. Similarly, a ROAS of over 4:1 is considered good in Google ads, but 6:1 to 10:1 is the ideal range for Facebook ads.

The takeaway is - you need to set more realistic ROAS targets based on your industry benchmarks, business objectives, and advertisement platforms. Once that is done, try to slowly increase the return on ad spend by following the strategies discussed in the next section.

Strategies to improve ROAS

There are three key ingredients to improving ROAS - lower ad spend, higher CTRs, and higher conversion rates. In this section, we will look at 5 battle-tested ROAS tips that use one of the above three ingredients to enhance your ROAS -

Relevant Targeting 

When you advertise to the right audience, your ad expenses automatically come down. There are two reasons for this: 

1. Your ads get shown to only those who are likely to be interested in your offering. For instance, if you are selling trekking shoes for women, your audience will skew towards females in the age group of 18 to 45. You might not enjoy a good ROAS if you deliver these ads to a much larger audience comprising males or females who are outside this age group.  
2. Targeted ads attract higher Quality Scores as ad relevance is one of its contributing factors. Higher Quality Scores, in turn, results in higher ranking which can bring down the average CPC. To the unversed, Quality Score is a metric calculated by Google and Microsoft to determine your ad rank. 

These days, there are several tools like AdRoll, Criteo, and IBM Watson Advertising that use advanced AI and ML algorithms to analyze mountains of data to predict user preferences and behavior. They can predict which audience segments are most likely to engage with specific ads. This, in turn, helps you target those segments with relevant ads and with great accuracy.

Optimizing Ad Creatives 

Here’s a question - Why do ad creatives work?

Because people are inherently visual creatures - they love to engage with videos and images rather than text as it can be consumed faster. 

Does this mean it is easy to grab the attention of everyone using an image or a video?

No!

Unless the creatives are appealing and resonate well with the audience, the chances of them clicking the ad are as good as having no creatives. 

So, how do you find out which creative is appealing and works with your audience? Sorry to disappoint you; there’s no shortcut. 

You need to create multiple variants of the creatives, A/B test them for performance, and use the creative with the most promising performance. But we understand creating multiple variants of an ad creative is not easy. 

Luckily, this time, we have a shortcut, that too, a highly effective one - Eacel. By using this AI-powered ad creatives generator, you can instantly access unlimited variants of your ad creatives just by inputting your brand elements and ad parameters.

Enhancing Landing Page Experience 

Imagine a situation. Your highly popular newspaper ad has brought the user to the doorsteps of your store. Now, the customers will step into the store only if the storefront is welcoming. Secondly, they will become your customer only if the store personnel offer a highly personalized experience.

Now, replace:

Newspaper ad —> Digital ad

Physical store —> Website

Storefront —> Landing page of the ad

As you can see, unless your landing page is not attractive enough, no one will explore your offerings. And unless you offer a personalized experience via conversion-driven storytelling, they are not going to get converted into customers. 

When you connect your ads to highly relevant post-click experiences, you not only reinforce the promise of your ad but also have an opportunity to blow the socks off the user. A highly personalized landing page experience that appeals to the goals of the target audience will offer a much smoother path to conversion and also contribute to your ad’s quality score. A higher conversion rate, ultimately, leads to a better ROAS.

Here are some tips to enhance the landing page experience - 

• Ensure that the landing page copies focus on how customers will benefit from your offerings instead of what your product or service does. 
• Include social proof, such as ratings and customer testimonials, to build trust for your brand.
• Optimize the page speed by reducing redirects, compressing images, and adopting browser-based caching. 
• Keep everything simple and straightforward. Your landing page should be short, forms must be easy to fill, and there should be a clear primary call to action.

• Use an eye-catching headline that instantly sums up why the user must buy your product or service.

Leveraging Advanced Bidding Strategies

There was a time when you had to manually analyze your ads and adjust your bids to maximize the value of your campaign. But today, you have access to advanced bidding strategies that can automatically achieve the same without your intervention. These strategies tweak your bids continuously by analyzing factors such as location, time of day, and shopping behaviors so that you spend less on low-value targets.

Google’s Smart Bidding is a collection of advanced bidding strategies that uses AI to optimize your ads for conversions in every auction. It uses goal-oriented and auction-time bidding that sets a bid for every query. Here are a few types of advanced bidding strategies under Google Smart Bidding:

• Maximize clicks: Automatically sets your bids to attract maximum clicks
• Target CPA: Automatically sets your bids to get as many conversions as possible at a pre-set CPA
• Target ROAS: Automatically sets your bids to get as much conversion value as possible at a preset ROAS. 
• Maximize conversion value: Automatically sets your bids to get the maximum conversion value for your budget.

Utilizing Analytics for Data-Driven Decisions

Digital advertising is evolving at a rapid pace. What works today might not work tomorrow. Unless you are agile, learn continuously, and adapt rapidly to shifting market trends and consumer behaviors, your ad efforts may go in vain. Analytics provide the fuel for this agility. It offers real-time insights into your campaign performance, audience behavior, and ad effectiveness. 

By leveraging analytics tools, you can track basic metrics such as click-through rates, conversion rates, and cost per acquisition. This helps in gaining a good foundational understanding of your campaign effectiveness. But many of these platforms also come with advanced analytics capabilities, such as predictive modeling and cohort analysis. This allows you to uncover hidden trends and patterns within the data, enabling more informed decision-making regarding your ads, which can lead to better ROAS.

Ultimately, the idea is to smartly use the data to constantly make revisions including change in messaging, format, and even a different advertising channel. This will be a perennial process and you need to constantly tweak the elements to keep up with the changing customer preferences. 

Wrap Up

In this post, we have seen that in performance marketing, a high ROAS is the ultimate barometer of success. But this requires a departure from manual methods and a step into the world of automation. Right from targeting to setting bids, automation, and AI can be the friend you always need to taste success in digital advertising. When it comes to automating ad creatives generation, look no further than Eacel, which can help you generate high-quality creatives at scale and elevate your marketing campaigns to new heights. Create an account with Eacel now.