05 June 2023 |
Data, Insights, Privacy
What is ROAS?
ROAS stands for Return on Advertising Spend. It is defined as a marketing metric that measures the amount of revenue earned for each dollar it spends on advertising. For example: if an advertising campaign generates $10,000 in revenue and the cost of the campaign is $2,000, the ROAS would be 5. This means that for every $1 spent on advertising, the campaign generated $5 in revenue.
In other words, ROAS indicates the effectiveness of your advertising effort. The higher ROAS, the better.
ROAS formula = revenue from ad campaign / cost of an ad campaign.
What are the differences between ROAS and ROI?
ROI stands for Return On Investment. ROI assesses the profitability and efficiency of an individual investment or a portfolio of investments. To further explain this, ROI provides organisations with insights into whether they have made a good investment to make better business decisions in the future.
ROI formula = [(profits – costs) / costs] x 100
How is ROAS different from ROI?
Ad spending is still a part of the investment, hence, it is easy to confuse ROAS and ROI.
ROI looks at a comprehensive approach to the profitability of an investment, used for long-term strategic planning. This metric takes into account all costs and returns associated with the entire investment (additional expenditure, for example promotion, research, domain hosting, and so on)
ROAS on the other hand is a subset of ROI that focuses on advertising spend and revenue of your advertising campaigns. This is one of the most important key metrics for tactical planning.
ROAS or ROI?
It should not be an either/or situation. While ROI measures your business’ long-term profitability, ROAS may be more suitable for short-term optimisation. Hence, for an effective digital marketing campaign, you will need ROAS and ROI.
Why your ROAS are lower than before?
1. Landing pages:
Landing pages need to ensure a good user experience to convert visitors into customers. Hence, you need to pay attention to usability, design, and mobile friendliness. Making changes to the landing page is necessary. However, you may be missing opportunities to increase your ROAS if:
Your landing page takes longer to load
The quality of the new landing page is lower than before.
2. Business model:
The conversion rates might have stayed the same month on month. This does not guarantee that you have a high ROAS. In fact, if you have reduced the price, it could contribute to lowering your ROAS.
For example: if you sell 10 cakes for a month ($15/each) and spend $10/each, you made $150 and your ROAS is 1.5. Next month, you continue selling 10 cakes ($11/each) and still spend $10/each, you made $110 and your ROAS is 1.1.
It could be applied in the case when you are operating your business in a drastically competitive market and you are under pressure to lower your price or increase your advertising cost. This could drive up to a lower ROAS.
Certain industries or products may experience seasonal fluctuations in demand. For example, if you are selling Christmas trees and decorations your ROAS will skyrocket in December, but you cannot expect to hit the same performance in January. If seasonality plays a role in your business, you need to align your marketing with the market trends. Hence, you can assess seasonality by looking at the time series – historical data.
Question to ask yourself: are your advertisements reaching the correct audience? Irrelevant targeting can result in wasted effort of the digital campaigns, which eventually causes low ROAS.
5. Ad quality:
Poor ad quality can be seen with a lack of attractive visuals, engaging copy, or unclear call-to-action button (See our article on why call-to-actions are so important in social media marketing). In other words, if your ads are not compelling enough, they fail to capture the audience’s attention and produce the desired ROAS.
6. Campaign optimisation:
After setting up your campaign, always be proactive in monitoring and be optimistic about your advertising campaigns to maximise your ROAS. If you fail to optimise your campaigns based on performance data, you may be missing opportunities to improve your ROAS.
See our article on how to choose the correct Facebook objectives when setting up your Facebook campaigns.
Optimisation steps can include: turning off the less performing creatives or ad sets to focus the budget on more performing ones, expanding the audience, or refreshing the custom audience groups.
In summary, ROAS is particularly useful in digital advertising. By evaluating ROAS, advertisers can optimise their advertising budgets, allocate resources effectively, and make data-driven decisions regarding their advertising strategies. Your goal is to keep your ROAS high. We have listed the factors that may impact your ROAS. However, it is a process that needs to daily monitoring and thorough testing with audiences. That’s why you need an experienced marketer like us to look after your campaign.Next Article