Even if you hate math, there are a handful of key metrics that every ecommerce business must track in order to stay competitive: return on investment (ROI), cost per click (CPC), return on ad spend (ROAS), and average order value (AOV), for instance, are examples of critical data points.
Not knowing whether you’re turning a profit, how much your paid traffic is costing you, or how much the average shopper is spending on your site per visit is like hitting the ‘self-destruct’ button on your business.
Don’t do it.
We’ve found that most digital marketing managers understand how to derive and track the essential metrics, but many can’t define ROAS or explain the difference between ROAS and ROI.
We’re here to fix that, right now.
In this article, we’ll look at what ROAS is, point out an oft-used variation in the ROAS formula that can be both confusing and misleading, then consider how the smart implementation of CRO can improve your bottom line – enabling you to get more sales without having to increase your marketing budget.
Here’s what we’ll be covering:
- Defining ROAS and how it’s measured
- How to improve ROAS for your ecommerce business through conversion optimization
The ROAS Definition – Measuring Your Return on Ad Spend
ROAS may sound a bit intimidating, but like many other financial equations – it’s quite simple to understand.
ROAS is an ecommerce marketing metric that measures the effectiveness of your advertising efforts. Much of the confusion arises because some marketers compute gross ROAS, while others compute net ROAS (which is really ROI).
We’re going to show you the right way to determine your return on ad spend. It’s a marketing metric that’s too important to get wrong.
This is the true ROAS formula:
Here’s an example: Let’s say you allocate $5,000 of your marketing budget to a PPC campaign. By tracking the clicks that the campaign generated and following them through to check-out, you’re able to determine that those clicks generated $15,000 in sales.
15,000 / 5,000 = 3
Every dollar of ad spend resulted in $3.00 worth of sales.
Here’s the point of contention. Some marketers say, “Hey, the net revenue is really $10,000. You have to subtract the advertising costs from sales resulting from the ads to get the true figure.”
And that’s true… if you’re calculating return on investment.
Here’s that formula:
And here’s how that looks, using our example:
(15,000 – 5,000) x 100 / 5,000 = 20 percent ROI
The Purpose of ROAS
ROAS tells you how many dollars you’re (hopefully) getting in return for every dollar spent on advertising. If your ROAS is 1, that means that you’re breaking even. If your ROAS is negative, your advertising efforts are working against you.
Note that you can reverse engineer the formula to determine how much revenue you expect to get back from ad spend. Advertisers often do this to develop a target ROAS for their Google AdWords campaigns.
Your target ROAS should be the average conversion value that you’re expecting to receive for every dollar you spend on an advertisement. The target will vary according to the company and the product being sold, but most are content with achieving a three to five times return on ad spend ratio. When conversion rate optimization (CRO) is properly implemented, that number can jump up significantly (more on that later).
At The Good, we tend to say a good ROAS not only at least doubles your investment, but (more importantly) is a metric that keeps improving through the diligent application of conversion rate optimization and a rigorous testing protocol.
ROAS tracking helps you evaluate the effectiveness of your advertising and marketing efforts. When combined with customer lifetime value (CLV), ROAS provides insight into where you should invest your marketing dollars to receive the most impactful results.
Return on Investment is one measure of the profitability of your business. It is a ratio of net revenue to the expense required to obtain that revenue. Both metrics, ROAS and ROI, are important to track and monitor. It is essential, though, that there is agreement on how each metric is derived, and that they are always calculated in the same way. Otherwise, you can be deceived by movements in the results.
How to Draw Better Results (Higher ROAS) from Your Advertising Budget
Remember that ROAS is determined by dividing the total revenue produced from your ads, by the cost of those ads. If revenue increases – but ad spend remains the same – your ROAS will grow.
You may be asking yourself how you can achieve this feat? It’s simple: through conversion rate optimization.
- Use CRO to remove friction and convert more of those who click on your ads into paying customers. Optimize your landing pages and product pages to ensure a seamless and frictionless shopping experience for your users.
- Use CRO to get those who do buy your products, to buy even more (increase average order value).
- Use CRO to diminish cart abandonment, meaning more prospects make it on through to completing a purchase on your site.
These are three of the primary ways CRO can help you increase your ROAS metric. There are multiple touch points that occur between an advertisement, and the payment. You can use CRO to ‘grease the path to conversion’ at any (or all) of those potential ‘stuck points’, to get more sales.
By removing any friction points in the user experience, you’ll create a seamless buying experience for your customers. Believe it or not, we’ve seen ecommerce websites double their ROAS after engaging in an optimization program.
It’s not uncommon for our agency to engage with a client that’s prepared to give up on pay-per-click advertising altogether. We frequently hear from ecommerce brands that PPC advertising just isn’t suited for their business, or that it’s a waste of time and resources.
Here’s the thing: after we apply sound conversion rate optimization principles to landing pages and the checkout procedure, and that same business gives PPC another shot, they’re always surprised by the difference that CRO had on the efficiency of their campaigns.
You Can Get Better Results from Your Ad Spend
By determining your present ROAS, then incorporating the principles of conversion rate optimization, you’ll be well on your way to improving your company’s ROAS for advertising and marketing campaigns in the future.
If you’re not sure where to begin, or don’t have the means to start an optimization program on your own, schedule a free landing page teardown, where we’ll take an in-depth look at your website and provide actionable feedback on how you can start to improve your website’s conversion path.
We’ll assist you in uncovering the ‘conversion blockers’ that are hindering sales, then we’ll start removing those friction points and set you on the path to improved ROAS.
It’s time to get your ecommerce website on the path to a healthier ROAS. Stop pouring money into ads that just don’t convert.
Want a free landing page teardown?
We’ll provide a data-driven critique of the usability and effectiveness of your site free of charge.
About the Author
David Hoos is the former Director of Marketing at The Good, conversion rate experts who deliver more revenues, customers, and leads. David and the team at The Good have made a practice of advising brands on how to see online revenue double through their conversion rate optimization services.