Return on Ad-Spend or ROAS is a metric that is calculated by dividing the revenue that is generated from an ad-campaign, by the cost of that campaign. This can also be applied to any sales situation that has advertising spend. As an illustration, let’s say your mum gave you a pan of brownies to sell at the bake sale, but it costs $100 to get both your booth and marketing materials set.
That $100, in this case, is your ad-spend. If you were able to generate total revenue of $100, then you’ve broken even. In other words, you’ve got a full return on your ad-spend. If you had produced the brownies yourself, and they cost you $100 to make, then your total investment would be $200, but ROA only considers ad-spend. So in this same case, you’re getting a full return on your ad-spend and not just a full return on your investment. One of the exercises you could carry out before launching a PPC campaign is to calculate the potential ROAS of the keywords you’re targeting. However, you must understand that they’re some few variables. Although there are some tools to help come up with potential traffic and potential costs.
How To Calculate ROAS
ROAS stands for Return on advertising spend. It’s a marketing metric that measures the efficacy of a digital advertising campaign. In order to calculate a predicted ROAS in PPC advertising. It’s important to know the revenue that each conversion brings for each product you’re marketing, the potential cost of the campaign, and an educated guess at what kind of a conversion rate you might achieve. Once you have the information about what the conversion is worth, all the information you need is available in rough form from websites such as Google and Yahoo keyword tools.
Yahoo gives the estimated number of clicks and cost per click for a keyword, so it’d be easy to calculate the expected cost of the campaign per month. In addition, AdWords also gives an approximate search volume with the estimated CPC, which can be used to determine a rough estimate of traffic at various click-through-rates, and how much it’s cost.
Calculating ROAS
ROAS= Gross revenue from advertisement campaign/ Cost of an Ad campaign.
As an illustration, a company spends $2000 on an online advertising campaign in a single month. In this month, the campaign results in revenue of $10, 000. Therefore, the ROAS is a ratio of 5 to 1. This is simply done by following the formula written above, $10, 000 divided by $2000, which equals $5.
Revenue/Cost= $10,000/$ 2,000 =5:1
The implication of this is that for every dollar that the company spends on its advertising campaign, it generates $5 worth of revenue.
Why does Return on Advertisement campaign (ROAS) matter?
ROAS matters, because it’s essential for quantitatively assessing the performance of ad campaigns and how they contribute to an online stores’ bottom line. This is also combined with customer lifetime value, insights from ROAS, across all campaigns, inform future budgets, strategy, and overall marketing direction. By constantly monitoring ROAS, e-commerce companies can make more educated and informed decisions on how and where to invest their ad dollars. It also helps companies become more efficient.
Considerations You Shouldn’t Forget When Calculating ROAS
There are some things you should consider when calculating ROAS. Below are some of the factors that contribute to the returns on ad campaign:
- Partner/ Vendor costs: There are some fees and commissions that are associated with partners and vendors that help on the campaign. It’s important to give an accurate account of in-house advertising personnel expenses like salary, and other related costs must also be tabulated. However, ROAS will not show the efficacy of individual marketing efforts if these factors are not well and accurately quantified.
- Affiliate commission: This has to do with the percent commission that is paid to affiliates, as well as network transaction fees.
- Clicks and impressions: It’s important to factor in metrics such as the average cost per click, and the total number of clicks, the average cost per thousand impressions, and the number of impressions that are actually purchased.
When Is ROAS Considered Good?
A good ROAS is influenced by profit margins, operating expenses, and the overall health of the business. However, it might be a bit difficult answering this question, as there is usually no right answer. The prevalent ROAS benchmark is a 4:1 ratio, which means a $4 revenue to $1 in ad spend although some cash-strapped start-ups may require a higher margin, while e-companies that are committed to growth can afford higher advertising costs.
What Are The Ways Of Launching Better PPC Campaigns?
PPC marketing, also known as pay-per-click is a model of internet marketing in which advertisers pay a specific fee each time of their ads is clicked. In other words, it’s a way of buying visits to your websites, instead of attaining the visits organically. One of the most popular forms of PPC is search engine advertising. Below are some of the tips and tricks involved in optimizing your PPC campaigns:
- Define your goal: It’s important to have a goal, especially in PPC advertising. It would be impossible to optimize your PPC campaigns without a definite and measurable goal. Ideally, your goals should serve as the foundation of your optimization process. Your goal would ensure that you have a road map to follow before you start with PPC advertising.
- Focus on high-performing keywords: One of the ways of optimizing your PPC campaign is by checking the performance of your keywords. By reviewing your keyword’s performance report, you can see which keywords are performing the best, and are actually paying your back. In addition, you should keep introducing changes at the bidding strategy of these keywords. This helps to trace out the optimal bid for each of the keywords.
- Filter out low-performing keywords: Even though there would be keywords that would be doing excellently well, there would also be other keywords that won’t perform as well and may hurt the performance of the entire campaign.
References
Predicting ROAS and Launching Better PPC Campaigns. (2019). Retrieved from https://www.acquisio.com/blog/agency/predicting-roas-and-launching-better-ppc-campaigns/
Vigneron, B., & Vigneron, B. (2019). Improve Your Marketing ROI Predictions With These 3 Considerations – Marketing Land. Retrieved from https://marketingland.com/3-considerations-better-predict-true-marketing-returns-95131