Whether you’re running a campaign on Google Ads, Microsoft Advertising, or Facebook Ads, you can probably track multiple metrics. Tracking click-through rate (CTR) will reveal the percentage of users who clicked your ads after seeing them. Tracking conversion rate will reveal the percentage of users who performed a conversion action after clicking one of your ads. If there’s one metric you don’t want to overlook, though, it’s Return On Ad Spend (ROAS).
What Is ROAS?
ROAS is the amount of revenue earned or the amount of money lost per dollar of advertising expenditure. It’s calculated by dividing the total conversion revenue of an advertising campaign by the total advertising expenditure.
A ROAS of $1 indicates break-even. If you spend $1,000 on an advertising campaign that generates $1,000 in conversions, your ROAS for that advertising campaign will be $1. You won’t realize any gains from the advertising campaign, nor will you realize any losses. A ROAS higher than $1, on the other hand, indicates profitability. If the same advertising campaign drives $1,500 in conversions, your ROAS for it will be $1.5.
Not all advertising campaigns are profitable. You may end up spending more money on an advertising campaign than the conversion revenue it generates. With unprofitable advertising campaigns such as this, you’ll have a ROAS that’s less than $1.
ROAS vs ROI: What’s the Difference?
In addition to ROAS, another metric you can use to determine whether an advertising campaign is profitable is return on investment (ROI). ROAS and ROI are similar, but they aren’t necessarily the same.
The main difference between ROAS and ROI is that the former only takes into conversion revenue and advertising expenditure. ROAS is calculated entirely on these two factors. ROI takes into account other factors, specifically those related to indirect costs like labor and overhead.
ROAS is typically expressed as a flat dollar amount or, in some cases, a ratio. ROI, conversely, is always expressed as a percentage.
ROAS is always a positive value, whereas ROI may be a positive or negative value. A negative ROI indicates unprofitability. If you spend $1,000 on an advertising campaign that generates $500 in conversions, your ROI for that advertising campaign would be negative 50 percent. While still expressed as a positive value, a ROAS that’s less than $1 indicates unprofitability.
Benefits of Tracking ROAS
By tracking ROAS, you can easily distinguish between profitable and unprofitable advertising campaigns. Click-through rate and conversion rate are important as well, but they don’t offer insight into profitability. You may have a profitable campaign with a low CTR or a low conversion rate. Alternatively, you may have an unprofitable campaign with a high CTR and a high conversion rate.
Tracking ROAS is easier than may you think. The ROAS formula is simple. You don’t have to crunch a bunch of numbers. Just look at your conversion revenue and advertising expenditure. As long as your ROAS is higher than $1, you can rest assured knowing that the advertising campaign is profitable.
You can use ROAS to conduct split tests. Split tests require insight into profitability. You’ll need to know how one or more asset variants perform in comparison to the original asset. Maybe you want to split test a new landing page, or perhaps you want to split test a new ad. You can measure the performance of asset variants such as these by tracking ROAS.
Google also offers a special ROAS-based bid strategy. Known as target ROAS, it allows Google to adjust your maximum bids automatically based on your desired ROAS. You can apply it to a single campaign, or you can apply it to all of the campaigns in your Google Ads account. Regardless, selecting the target ROAS bidding strategy means you can specify your desired ROAS. Google will then adjust your actual bids to help you achieve this ROAS.
Tips to Increase ROAS
You can optimize an advertising campaign for a higher ROAS in several ways. If it’s a cost-per-click (CPC) campaign, make sure your ads are clear and informative. Clickbait ads that lure users into clicking them will only hurt your ROAS. You’ll experience a higher total advertising expenditure and a lower conversion rate, resulting in a low ROAS.
Changing the keywords or audiences that your advertising campaign targets may lead to a higher ROAS. Keywords and audiences should closely match your ads and landing pages. Using a broad targeting strategy that encompasses irrelevant keywords or audiences may drive more clicks, but it will probably come at the cost of a lower ROAS.
Check your landing pages to ensure they load flawlessly on mobile devices. According to Statista, nearly one in three clicks on Microsoft Advertising come from a mobile device. A staggering 70 percent of clicks on Google Ads, however, come from a mobile device.
You can use ad extensions to achieve a higher ROAS. They are available for Google Ads and Microsoft Advertising campaigns. When enabled, ad extensions will add new information or features to your ads. Ad extensions educate users about your landing pages while also encouraging them to click your ads.
Don’t ignore your quality scores. Most online advertising networks have a quality score system. When you create an advertising campaign, they’ll assign quality scores to your keywords or ads. Networks will evaluate all of your assets, and they’ll assign quality scores based on factors such as relevance and quality.
Increasing your quality scores will typically have a positive impact on your ROAS. Quality scores affect the cost of ad inventory. By earning high quality scores, you’ll pay less to run your advertising campaign. A lower total advertising expenditure will then increase your ROAS.
Online advertising campaigns typically support multiple metrics. Among the most important advertising metrics is ROAS. It represents your direct gains or losses per $1 of paid advertising. Tracking ROAS will allow you to easily distinguish between profitable and unprofitable advertising campaigns. You can even use this data to conduct split-tests that further increase your ROAS. If you’re going to run an advertising campaign, always track ROAS so that you can take advantage of these benefits.