What Is ROAS In Marketing: Calculate And 9 Ways To Optimize

ROAS in marketing is a crucial metric in the ever-evolving landscape of digital marketing. As we step into 2023, the importance of ROAS continues to grow, shaping the way businesses strategize their marketing efforts. If you’re looking to unlock the secrets behind optimizing your ROAS and enhancing your advertising performance, delve into our comprehensive guide at AdsNextGen. We’ll explore the latest trends, proven tactics, and expert insights that will empower you to achieve exceptional ROAS results in this dynamic marketing environment.

Understanding ROAS in Marketing

ROAS in marketing (or Return on Advertising Spend) is a metric that helps you measure how well your advertising efforts are working in terms of converting viewers into paying customers. It’s calculated by comparing the amount of money you spend on digital advertising against the returns you get from those efforts. In short, ROAS is a way to measure the effectiveness of your advertising campaigns. The more effectively your ads resonate with your target audience, the higher your revenue for each dollar spent on advertising. A higher ROAS means that your advertising campaigns are performing well.

How To Calculate Return On Ad Spend

ROAS can be determined with a straightforward formula known as the return on ad spend formula:

ROAS = (Revenue from ads)/(Adspend)*100

Let’s illustrate this with an example: Imagine you’ve invested $1000 in an ad campaign and managed to trace $3000 in revenue back to those ads. Using the return on ad spend formula, you’ll calculate an ROAS of 3, which is considered a highly favorable result.

However, calculating ROAS can become more intricate when it comes to defining the cost of ads. Here are some things to think about:

• Vendor Costs: Vendors you collaborate with often charge commission fees for running the ad campaign.
• Team Costs: Whether you have an in-house team or work with an agency, you need to allocate expenses for campaign setup and management.

Your choice of how to define the ‘cost of ads’ in your ROAS calculation depends on the nature of your campaign. Sometimes, it’s more effective to stick with precise ad costs and create a separate ROAS that encompasses all additional advertising expenditures. This approach provides you with a comprehensive view of the performance and profitability of every campaign where ROAS serves as a key performance indicator (KPI).

Why does ROAS matter?

ROAS in marketing holds a vital role in your app marketing strategy because it answers the fundamental question: “Are my marketing efforts effective?” It guides decisions on where to allocate more budget and where to scale back.

For instance, if a campaign brings in high-quality users who generate substantial revenue, but the costs outweigh the gains, that campaign can’t be deemed successful. ROAS pinpoints this outcome.

You can analyze ROAS at various levels, from the broader perspective of your advertising budget to specific campaigns, ad sets, individual ads, and even creative elements based on your desired insights.

Here’s an additional note: Partial ROAS can be immensely valuable, particularly when predictive analytics come into play. For instance, if you discover that users who recoup 50% or more of their acquisition cost by Day 3 tend to become profitable users by Day 30, you can optimize your strategy by cutting off underperforming ad sets.

However, while ROAS marketing is a potent standalone metric, it doesn’t provide the complete picture. To gain a comprehensive understanding of performance, you should also consider metrics like CPA, ARPU, and LTV. Integrating these metrics equips you to make more informed decisions about future budgets, marketing strategies, and even product development.

Benefits of using Return On Ad Spend (ROAS)

The following are some advantages of using ROAS to evaluate how profitable a business’s marketing initiatives are:

1. Identifies inefficiencies

ROAS calculations frequently serve as a tool for pinpointing inefficiencies within a company’s marketing endeavors. The return on ad spend formula is instrumental in identifying these inefficiencies. A diminished ROAS could indicate excessive spending in the campaign’s ad development, whether through employee payroll, vendor fees, or inefficient advertising platforms. This insight enables companies to address these areas to trim their expenditures. Strategies may involve downsizing the workforce dedicated to specific ad campaigns, discontinuing partnerships with certain vendors, or reallocating resources away from low-revenue-generating campaigns.

2. Indicates effective ad channels

Analyzing ROAS marketing individually for each ad campaign can provide valuable insights into the effectiveness of different marketing channels for a company. For instance, when a business utilizes email ads, drip marketing text messages, and a social media ad campaign, it can calculate the ROAS for each channel. If text messaging and social media ads yield higher views and revenue, it may prompt the company to allocate more resources to these channels while possibly reducing or discontinuing its email campaign.

3. Improves planning

By computing its ROAS, a company can enhance its grasp of profitability and make necessary adaptations to its objectives and strategies. ROAS aids businesses in preparing suitable marketing budgets for upcoming initiatives, fine-tuning their messaging, and potentially hiring extra personnel for effective advertising creation. Furthermore, it serves as a gauge for executives and board members, revealing the campaign’s efficiency in reaching the intended audience. This insight assists them in deciding whether to invest in new product development or shift their focus to a different customer segment.

Limitations of using return on ad spend

The following are some possible drawbacks of depending just on ROAS:

1. Restricted scope

Determining the ROAS in marketing can offer significant insights into a company’s profitability, yet it remains limited in its scope as it doesn’t account for external business factors like production and distribution. In situations where a company faces high production costs, intense market competition, or substantial distributor fees, it may incur losses despite the effectiveness of its marketing efforts. To mitigate these potential oversights, businesses should assess their efficiency across all departments using a range of metrics.

2. Inaccuracy

While the process of calculating ROAS itself may be straightforward, obtaining the necessary data can be a more complex endeavor. Identifying all the variables that play a role in advertising costs can be challenging, especially when customer motivations are not readily apparent, making it difficult to attribute increased revenue to specific ad campaigns. To address this uncertainty, businesses may explore alternative metrics, including those provided by e-commerce platforms, which can offer more accurate data and simplify the process of associating revenue with advertising efforts.

4. Often requires supplementary data

The suitability of a ROAS calculation can vary depending on the business model. It tends to be more effective for companies primarily operating in e-commerce since online platforms provide metrics that reveal which ads attract the most views and drive customer purchases, enabling businesses to correlate revenue with their ad campaigns. Conversely, ROAS may be less suitable for organizations relying on traditional print or physical advertising with limited additional metrics. In such cases, these companies may explore the incorporation of alternative metrics to assess their performance or potentially transition to an e-commerce model.

What is a good ROAS?

The question of what is ROAS and what constitutes a good ROAS has puzzled marketers for ages. The truth is, there’s no one-size-fits-all answer. The key takeaway is that a positive ROAS is a good ROAS, even though it may take months to turn a profit from a user or campaign.

Moreover, what’s considered a good ROAS can vary significantly depending on an organization’s goals. For instance, in a hyper-casual gaming app with minimal profit margins, the focus is on achieving scale to drive profitability due to low ad revenue per view. Conversely, subscription-based apps like Netflix or Spotify can attain higher margins despite relatively higher acquisition costs, thanks to recurring subscription revenue.

The definition of a good ROAS is also influenced by the advertising platform used. For instance, Databox research indicates that companies typically achieve returns ranging from 6x to 10x (or 600% to 1000%) on Facebook ads.

On the other hand, the average ROAS for Google Ads hovers around 200%. These figures, while impressive, are general averages and may not reflect specific industry, company size, or audience variations. So, don’t be alarmed if your results deviate from these benchmarks!

Best 9 ways to improve your ROAS

The constant aim of a marketer is to boost sales and conversions. Now let’s examine a couple of strategies for raising your ROAS.

Set benchmarks

To determine your target, it’s essential to establish a clear understanding of what constitutes a favorable ROAS in marketing and use it as a reference point. Identifying the performance baseline for each campaign and channel can shed light on your past achievements and provide a blueprint for upcoming campaigns.

Test and learn

Attaining a favorable ROAS hinges on various factors, making it crucial to experiment with different campaigns, creative content, and channels to pinpoint those that yield the most favorable outcomes and valuable user acquisition. Employ A/B testing to explore diverse creatives, placements, and targeting strategies.

Optimize your landing pages

If your ads are generating a substantial number of clicks, yet your ROAS in marketing continues to lag, it’s crucial to scrutinize the destination of these clicks. Is your landing page both informative and captivating? Does it maintain visual consistency with the ad? Is the page load time swift? Are the calls to action easily discernible? Numerous adjustments can be implemented to ensure a seamless progression along the purchasing journey for users.

Lower the cost of your ad

To enhance your return on ad spend, consider these strategic steps:

First, improving your quality score can yield a more favorable outcome. A higher quality score results in better ad placements and ultimately reduces your cost per click (CPC).

Furthermore, it’s essential to be selective with your choice of keywords. Instead of targeting highly competitive terms, opt for long-tail keywords that are closely aligned with your niche.

Another smart move is to incorporate negative keywords. These exclusions help filter out users who may be searching for products similar to what you offer but not the exact item you’re promoting. By doing so, you can prevent irrelevant clicks that cost you money and provide little to no return on investment.

Know your audience

Conduct thorough customer research to grasp your ideal customers’ online presence, preferred times of activity, and areas of interest. For instance, if you identify them as parents engaging with food-related content on Facebook, they’ll likely be interested in your family recipe app. When you precisely tailor your message to your audience, you can boost conversion rates and eliminate unnecessary spending on irrelevant channels.

Reengage valuable users to boost sales

Re-engaging existing users is not only cost-effective but can also be cost-free when utilizing your owned channels. If you have a group of users who have already demonstrated a high return on ad spend (ROAS), it’s crucial to re-engage them and prompt repeat purchases. An effective approach is to employ limited-time offers, which not only make users feel like they’re getting a great deal but also valued and appreciated as loyal customers.

Bid smarter

Test out several bid tactics to see which is the most economical. You could discover that lowering your maximum offer, employing automated bidding, or establishing various bids for desktop and mobile help you save money.

Use predictive analytics

Understanding the lifetime monetization patterns of your top users within your app can be a game-changing strategy for optimizing ROAS. By establishing a connection between early funnel interactions and future monetization, you can substantially enhance your ROAS.

For instance, if you discover that users who reach level 10 in your game within the first 24 hours of play are significantly more inclined to make in-app purchases, you can leverage this insight to fine-tune your campaign after just 24 hours, rather than waiting for later funnel signals. This approach minimizes inefficiencies and ensures you meet your revenue objectives.

See the bigger picture

When customers abandon their journey before reaching the checkout, it’s crucial to investigate the underlying reasons. Could it be due to pricing concerns, excessive information requests, or a convoluted process? To enhance the overall customer experience, it’s essential to look beyond advertising and focus on optimizing the entire customer journey.

ROAS vs other metrics

ROAS vs ROI

As mentioned earlier, ROAS stands for Return on Ad Spend, whereas ROI stands for Return on Investment. When you compute ROI, you’re evaluating the return generated by a specific investment about the initial cost of that investment. It’s a calculation that involves your net profit and the investment, typically expressed as:

ROI = (Net profit / net investment) x 100

While ROAS shares similarities with ROI, it primarily serves advertisers and marketers by gauging the overall efficiency of online or mobile marketing campaigns. It determines the exact amount of revenue generated from a campaign about the precise amount invested in it. It’s essential to note that a negative ROI can still result in a positive ROAS. This can occur when your overall investment exceeds the profit earned, but in the context of the advertising campaigns themselves, the ROAS remains favorable (depending on how it’s calculated).

ROAS vs CAC

Your Customer Acquisition Cost (CAC) represents the expense associated with acquiring a new paying customer. To calculate CAC, you simply divide your total campaign expenditure by the number of paying customers acquired.

For instance, if you invested $2000 in a campaign and successfully gained 200 customers, your CAC would be $10 per customer.

While both CAC and ROAS evaluate the outcomes of your spending, CAC is centered on the number of customers obtained, regardless of their eventual value. On the other hand, ROAS provides insight into the revenue generated by those customers. Analyzing ROAS allows you to ensure that you’re not only acquiring customers but valuable ones, helping you target your efforts effectively.

ROAS vs. eCPA

Effective cost per action, or CPA, provides a clear evaluation of a campaign’s financial effectiveness. For example, your CPA is $5 if you invest $1,000 in an advertising campaign and get 200 actions (clicks).

While both ROAS and eCPA offer financial insights into the performance of a campaign, eCPA only takes the amount of actions into account and ignores the money earned. For example, if these 200 actions translate into $1,500 in revenue from in-app sales, you may calculate the ROAS by dividing 1,500 by 1,000 (150%).

eCPA and ROAS should be prioritized metrics. You must move quickly to realign your campaign with its goals if your eCPA is higher than the targeted cost per action and your ROAS is not meeting your expectations.

ROAS vs. CTR

CTR, or click-through rate, is determined by dividing the number of clicks by the total impressions served. A high CTR often signifies that your ad has effectively engaged the audience, making it a useful gauge of a creative’s success in prompting action, such as a click.

However, it’s important to note that CTR primarily evaluates the creative aspect of a campaign, in contrast to ROAS, which offers insights into the comprehensive performance of the campaign, including revenue generated.

How is ROAS used in mobile marketing?

When you get to the point in mobile marketing when you are handling several campaigns, channels, and ad platforms, including ROAS in marketing, becomes quite important. It offers crucial supervision to identify the most productive regions deserving of ongoing budgetary support. Applying ROAS at various granularities allows you to calculate it for your total ad spend as well as segment it by platform, channel, and campaign. This analysis makes it easier to see which of your channels are the best and where the most profit is expected.

Establishing a minimum allowable ROAS before commencing any campaign is advisable. This makes it possible for you to evaluate campaign performance fast. It might be difficult to set this minimal barrier, depending on your app’s nature, business, and stage of growth. It may, however, adjust and fluctuate in response to variations in profit margins and operating costs.

Other key performance indicators and metrics for mobile marketing supplement ROAS. When paired with return on advertising sales (ROAS), metrics like cost per click (CPC), cost per acquisition (CPA), and cost per lead (CPL) may give marketers a clear and complete picture of how to accomplish their goals.

Adjust provides marketers and advertisers with a complete perspective of performance at all levels, including ROAS, by providing them with precise campaign data and insights through a single dashboard.

ROAS & Google Shopping campaigns

Shopping campaigns differ from search campaigns in that they rely on a product feed rather than conventional keywords. Shrewdly segmenting the product feed into different campaigns and ad groups and using exclusions to weed out goods that don’t fit into the right campaign or ad group is necessary to get the best return on advertising spend (ROAS) in shopping campaigns. Moreover, you might use a Target ROAS bidding approach if you have a lot of conversion data.

Similarly to the search campaigns we discussed earlier, Shopping campaigns can also utilize negative keywords to weed out irrelevant search queries. By structuring these campaigns effectively, you can enhance ROAS.

Shopping campaigns prominently feature images from your product feed and generally outperform text ads in terms of conversion rates, often at a lower cost per click. When managed proficiently, they can consistently yield conversions with an excellent ROAS.

ROAS in marketing plays a pivotal role in assessing the effectiveness and efficiency of advertising campaigns. As we’ve explored throughout this discussion, ROAS marketing offers valuable insights into the financial performance of marketing efforts. It enables marketers to make data-driven decisions, optimize budget allocation, and ensure that resources are directed toward the most profitable channels, campaigns, and strategies.

By understanding and applying ROAS, marketers can gauge the return generated for each advertising dollar spent, fine-tune their targeting, and continually improve their campaign performance. It’s a critical metric that aligns financial goals with marketing objectives, helping businesses thrive in a competitive landscape. In conclusion, ROAS is an indispensable tool for modern marketers seeking to maximize the impact of their advertising investments and achieve sustainable growth.