Understanding Return on Ad Spend (ROAS)

August 26, 2021

Marketers live and breathe in a competitive world dominated by data. In paid search, they're constantly working on improving prominent metrics, such as Quality Score, click-through rate, or cost per conversion. But often, we become focused on simple, core metrics and don’t take a look at the bigger picture.

Return on ad spend, or ROAS, however, does provide a look at the bigger picture. This metric offers greater insight into not only what’s leading to conversions, but also the amount of revenue our conversion actions are generating.

What is ROAS?

ROAS stands for return on ad spend—a marketing metric that measures the amount of revenue your business earns for each dollar it spends on advertising. For all intents and purposes, ROAS is practically the same as another metric you’re probably familiar with: return on investment, or ROI. In this case, the money you’re spending on digital advertising is the investment on which you’re tracking returns.

At the most basic level, ROAS measures the effectiveness of your advertising efforts; the more effectively your advertising messages connect with your prospects, the more revenue you’ll earn from each dollar of ad spend. The higher your ROAS, the better.

If you’re so inclined, you can measure ROAS at a variety of levels within your Google Ads account: the account level, the campaign level, the ad group level, and so on. As long as you know how much you’re spending and earning at that particular level, you can calculate ROAS.

How to calculate ROAS: A simple return on ad spend formula

Because ROAS is such an important and powerful metric, you may assume that it’s a hassle to calculate. Luckily, the opposite is true: The ROAS formula is incredibly simple. ROAS equals your total conversion value divided by your advertising costs.

For a hypothetical example, let’s say your business does lead gen and that you close 10% of all new leads. If each of these leads creates $5,000 of value, then you would multiply the value per customer by the lead/customer close rate and get a value of $500. In this scenario, a $500 CPA would lead to a ROAS of 1.0; a $250 CPA would lead to a ROAS of 2.0; a $166.67 CPA would lead to a ROAS of 3.0.

Take for example a campaign with the highest spend ha the highest volume of conversions, but it also has the lowest ROAS of any campaign with impactful spend. In this scenario, this advertiser should be diving into the campaign with the larger spend and looking at what’s actually working:

  • Keywords with high spend and no conversions
  • Search terms that lead to conversions
  • Negative keywords that don’t make sense for your business
  • Budget monopolization—an ad group, keyword, or related set of keywords using a lot of the budget with lower return

Often, bidding on search queries that have sales-related context or intent, i.e., “buy,” “shop,” “online,” “sale,” or “cheap,” can result in a higher conversion rate even on these results, even if their shorter-tail keywords without this context results would lead to a higher search volume. Greater context or intent in your keywords can be a huge plus!

With this particular account, we’d want to split out a larger, higher-spending, more general campaign into more segmented campaigns or ad groups that are both more specific and contextual and actually lead to better return!

Because the other, lower-spend campaigns have already been split out into their own respective subsets that lead to stronger returns, the goal would be to continue working on optimizing that larger, less-efficient campaign based on some of the key strategies above. In your own account, continue to review your impression share to ensure that these new, more efficient campaigns aren’t missing out on clicks due to inflated budgets of less efficient campaigns.

Want to learn more about optimizing marketplace ROAS? Get in touch with us here.

Cr: Wordsteam

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