It should be noted that a company’s high return on ad spend does not necessarily indicate that it is profitable because many other costs must be subtracted in order to calculate the net profit margin. However, this metric demonstrates the current relationship between advertising efforts and sales.
ROAS can be used to compare the cost-effectiveness of one marketing campaign to another in addition to determining how generally effective a company’s advertising is at generating sales. When advertising campaign “B” costs only one-fifth as much as advertising campaign “A,” for instance, even though campaign “A” may result in a twofold increase in sales volume, campaign “B” is the more cost-effective option.
While other advertising campaigns may show a significant increase in net profit margin even though sales only slightly increase, some advertising campaigns can increase total sales without quantifiably improving profitability. This could be as a result of campaign “B”‘s primary contribution to the growth of sales of goods with extremely high profit margins.
What Is ROAS: Everything You Need to Know About Return on Ad Spend
What does the return on ad spend ratio indicate?
Marketing professionals can determine whether a particular campaign is profitable for the company by calculating the ROAS. By displaying a campaign’s performance in terms of financial return, an ROAS ratio paints a complete picture of how well it performed. While some digital marketing metrics determine the number of users who view or interact with a campaign, ROAS enables marketers to see how their work on a campaign is related to the revenue it brings in.
The ROAS can provide marketers with information about a campaign’s profitability as well as a variety of other campaign specifics, such as:
What is the return on ad spend ratio?
Digital marketers use the return on ad spend ratio, or ROAS, a revenue-based calculation to estimate the total revenue generated by an advertising campaign. ROAS measures how successful a particular campaign was at bringing in money for the business or brand. The ROAS is typically expressed as a ratio, showing how much revenue is generated by each dollar. Typically, a 4:1 ratio or higher indicates that the campaign was successful.
The total revenue from a marketing campaign is divided by the total amount of money spent on the campaign to calculate return on ad spend. The price of labor, the cost of ad space, or the expense of creating the campaign’s content are examples of campaign expenses. The formula for ROAS is:
Return on ad spend is calculated as (total ad revenue / total ad expenditures).
How to improve your company’s return on ad spend
If you work in digital marketing, you probably know that many campaigns aim to increase the revenue generated by advertisements. While there may be other objectives, such as increasing brand awareness or your audience, revenue is frequently a key component of a successful campaign. To increase your return on ad spend ratio, think about taking the following actions:
1. Review the accuracy of the ROAS
When assembling data for your ROAS equation, think about checking its accuracy. Because the result of the ROAS equation affects subsequent campaigns, it is crucial to examine the accuracy of your data. When preparing to calculate your ROAS, think about using specialized software to gather precise data.
Additionally, it’s crucial to concentrate only on advertising-related expenses. Other expenses might arise, but the ROAS only accounts for overall advertising expenses like the price of buying ad space. It’s crucial to thoroughly check your data throughout the collection process because including other costs in your calculation could lead to an imprecise ratio.
2. Reduce your advertising expenses
Cutting back on your company’s advertising costs is one way to increase your return on ad spend ratio. There are a few different ways you could reduce the amount you spend on advertisements, depending on the size of your business or the scope of your current ad campaign, like:
3. Evaluate your campaigns
You can thoroughly assess your campaigns and promotions to find out how to best increase the revenue your business generates from advertisements. After that, you can make the necessary changes, which might boost the amount of money your business makes. Changing your target market or improving how you interact with your audience can occasionally result in an increase in revenue.
4. Find areas of improvement
Look for areas where your digital marketing team can improve. For instance, the success of a marketing campaign may be affected if your company’s audience has a neutral view of you. This is due to the possibility that the marketing team will have to solve the problem of attracting an impartial audience.
An in-depth analysis of a campaign may reveal specific areas where your company’s digital marketing team can enhance ads. By providing both statistical and observable evidence, this can amply demonstrate the success of a campaign. Following are some possible areas for improvement you might discover in an assessment:
FAQ
What is return on advertising spend?
Return On Advertising Spend (ROAS), a marketing metric, is used to assess the success of digital advertising campaigns. Online businesses can use ROAS to assess which advertising strategies are effective and how they can make improvements going forward.
Why is return on ad spend important?
When evaluating your paid advertising campaigns, return on ad spend is essential because it provides a clear estimate of the amount of sales your marketing is driving. If your ROAS is low, you should consider how effective your paid advertising is.
What is a good return on ad spend percentage?
A larger Google Ads budget may result from generating a higher ROAS, giving you even more room to promote your business’s success. Any ROAS for Google Ads that is above 400%, or a 4:1 return, is considered good. In some cases, businesses may aim even higher than 400%.
What is a good return on ad spend Google?
Strong returns in Google Ads campaigns look like a ratio of about 2:1, on average. This means you’ll earn $2 for every $1 spent. This return can increase to $8 for each $1 spent if you concentrate on your Google Search Network.
