Measuring how an advertising campaign is performing (and picking a metric to track performance) can be overwhelming. There are dozens of key performance indicators (KPIs) eCommerce companies use to measure different aspects of their performance, and it can be hard to focus on which ones are worth your time. ROMI, ROI, CTOR, CAC, CLV, Target CPA, cost per click—they can't all be worth your time, right?
Return on ad spend (ROAS), in particular, is often used to measure the ROI of your ad campaigns. Though it is commonly used, it has some intriguing controversy surrounding how insightful and accurate it truly is.
So, what is ROAS, and should you be using it?
What is ROAS?
Return on Ad Spend (ROAS) is a marketing efficiency metric that shows how much money you generate for every marketing dollar that you spend. It is one of the KPIs that many eCommerce brands use every day, and it helps judge the effectiveness of online advertising campaigns.
Ideally, you want to aim for a higher ROAS, which can indicate low advertising costs and/or a successful campaign.
ROAS Formula
To calculate ROAS, divide your brand's revenue by your total marketing spend over a particular time period. When adding up your marketing spend, remember to include your affiliate commission costs, personnel salary, vendor costs, and other fees specific to certain ad groups, such as cost per click.
Example of a ROAS Calculation
If your brand has a monthly Facebook ad marketing budget of $10,000, and at the end of the month, you drove a total of $40,000 in sales, it means that you have a ROAS of 400%. This figure can also be displayed as a dollar amount, a number, a ratio, or a multiplier: $4, 4, 4:1, or 4x.
How to Improve Your ROAS
The real key to improve your ROAS is to first examine it in separate parts. A number of factors can lead to a lower one:
- Incorrect or unspecific targeting on Facebook
- Low conversion rate
- Unoptimized ad budgeting
- Ad creative that doesn’t resonate with your target audience
Break down your campaign into different pieces to start seeing where you can improve your marketing strategy to either reduce the cost of those ads or increase your revenue.
Additionally, consider the following strategies:
Experimenting with Ad Placement
There are many places where you can display your ads. It is entirely possible that you haven't quite found the perfect recipe for success yet with your placements.
Try banner ads on targeted websites, or consider advertising on a new social media platform (have you tried TikTok yet?): this may be the key to finding a new audience segment.
Using Audience Targeting
Segmenting your audience is crucial. Create personas for your customers, and dig into who you want your different segments to target.
Personalizing your campaigns to those groups can revolutionize your marketing capabilities. especially by leveraging certain social media management tools. Also, retarget on Facebook, Instagram, and Messenger. If someone was already interested enough to hit your website or make a purchase, they are more likely to return.
A/B Testing Ad Copy
Because advertising is a game of experimentation and testing, it’s important to always test, re-test, and re-re-test your ads. We particularly recommend A/B testing your ad copy (and believe A/B testing in general is rightfully a best practice). From the testing, you’ll be able to glean insights around what ad copy increases conversion rate.
By optimizing your ad copy, your ads will perform better, and you’ll improve your ROAS.
Refining your Keywords on Google
Make sure you utilize the negative keywords feature, as incorrect targeting leads to unnecessary costs for your campaign. You can also lower your costs by focusing on long-tail keywords rather than competing with top dogs for those high-demand keywords. When combined, these strategies will lead to better conversion rates.
What Is a "Good" ROAS?
The measure of success for a specific ad campaign depends on the platform and your niche. Some platforms are more difficult to compete on than others, especially depending on your product offerings.
Determining what a "good" ROAS is changes based on your specific products and goals, but there are some generally accepted guidelines for different platforms.
What Is a Good ROAS for Facebook Ads?
Facebook has a large ROAS spread, but companies' averages often range from 4 to 10. Dynamic ads and remarketing can be especially helpful on Facebook.
Use your own customer data to take your Facebook advertising strategy to the next level, and optimize your ROAS on Facebook.
What Is a Good ROAS on Amazon?
The average ROAS on Amazon is around 3. However, this will vary dramatically for different categories of eCommerce sellers.
Many products are saturated in the Amazon marketplace, making advertising challenging within many product categories. Additionally, copycat sellers, increasing ad space, and reports of Amazon leveraging sellers’ data to create competing products are exacerbating the problem.
What Is a Good ROAS for Google Ads?
ROAS is particularly informative when calculating return on PPC campaigns through Google Ads.
On average, companies with strong targeting practices have a ROAS of 2 on Google Ads. However, there is little Google Ad ROAS data for specific industries, as companies often do not reveal their ad spend.
How Apple's iOS 14 Privacy Changes Affected ROAS
Mobile advertising spending is seeing rough shifts after Apple implemented App Tracking Transparency (ATT). With this feature, iPhone users are asked if they consent to be tracked by applications.
A study by Moloco found that the average CPA has risen by 200% for tracked users and 155% for non-tracked users since the update. Tracked iOS users fell by over 40% in the first six months after the change. Because online advertisers face higher advertising costs to create a successful campaign, they see a significantly lower ROAS.
Is ROAS an Overrated Metric?
It's time for some controversy. Although ROAS is a standard metric in eCommerce, we would heavily caution against using it as your sole measure of marketing success and trying to optimize based on it.
ROAS measures efficiency, and that is all it measures. If you have a marketing budget of $10,000 and you drive $40,000 in sales, you have a calculated ROAS of 4. However, that 4 tells you nothing about how much profit you actually made: the return on ad spend formula is based on revenue, which is a top-line figure.
How eCommerce Brands Should Use ROAS
At Daasity, we recommend tracking ROAS in conjunction with other metrics in order to get a true picture of your marketing performance. The metric is useful for providing a high-level view of what's going on with your marketing dollars. If anything changes dramatically, it's time to investigate.
But in many cases, it can be little more than a vanity metric. We would recommend focusing more on metrics such as CPA, contribution margin, AOV, and conversion rate.
Conclusion
ROAS, while a useful metric when strategically leveraged, is often overrated in its importance by eCommerce brands. It can be leveraged to gain insight into specific ad campaigns, you should always use it in conjunction with other KPIs and/or tools to gain a complete picture of your marketing success.
Your ROAS may be high, but that doesn't mean your profits are.
How to Measure Ad Performance with Daasity
While it would be great if a single KPI could tell you everything you wanted to know about your marketing campaigns and program, it’s necessary to have a suite of visualizations and metrics to get an accurate read on your ad performance.
Daasity empowers your team and gives you a holistic view of your ad performance and costs to truly measure your profitability and performance. Don't use a general vendor-reported KPI to make your decisions. Find the truth from your data.
