optimization

Improving ROAS — How to Drive Maximum Return on Ad Spend

By Jon MacDonald
5 minute read | Last Updated: October 25, 2017

ROAS or return on ad spend is an essential metric to monitor and to manage if you want to lower costs and drive higher ecommerce sales.

Even if you HATE math, there’s a handful of metrics every 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 to know whether you’re making a profit, how much your paid traffic is costing, and how much the average shopper is spending at your ecommerce store per purchase is digital hari-kari.

Don’t do it.

We’ve found that most digital marketing managers understand how to derive and track the most popular measurements, but many can’t define ROAS or explain the difference between ROAS and ROI.

Let’s 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 return on ad spend – enabling you to get more sales without increasing your marketing budget.

Really, it’s pretty simple. You’ll see.

How to get more sales without spending more on ads. Click To Tweet

The ROAS Definition – Measuring Your Return on Ad Spend

ROAS may sound a little intimidating, but like many other financial equations – it’s really not complicated at all.

ROAS is an ecommerce marketing metric that measures the effectiveness of your advertising. Much of the confusion arises because some marketers compute gross ROAS, while others compute net ROAS (which is really ROI).

Confused yet?

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.

Here’s the true ROAS formula:

roas

Example: You allocate $5,000 of your marketing budget to a PPC campaign. By tracking the clicks that campaign generated and following them on through to check-out, you determine 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 cost of the ads from sales resulting from the ads to get at the true figure.”

And that’s true… if you’re calculating return on investment.

Here’s that formula:

roas

And here’s how that looks, using our example:

(15,000 – 5,000) x 100 / 5,000 = 20 percent ROI

ROAS Purpose

ROAS tells you how many dollars you’re (hopefully) getting in return for every dollar spend on advertising. If ROAS is 1, you’re breaking even. If ROAS is negative, you’re upside down in your advertising efforts.

Note that you can reverse engineer the formula to determine how much revenue you expect to get back from ad spend. Advertisers often do that to develop a target ROAS in AdWords.

The goal varies, according to the company and the product being sold, but most are happy to achieve a three to five times return ratio on ad spend. When conversion rate optimization (CRO) is properly practiced, that number can jump up significantly (more about that later).

At The Good, we say a healthy ROAS is 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. When combined with customer lifetime value (CLV), ROAS provides insight on where to best invest your marketing dollars.

Resource: Internet Marketing Metrics

ROI Purpose

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’s is essential, though, that there be agreement on how each is calculated and that they are always calculated in the same way. Otherwise, you can be deceived by movements in the results.

How to Get Better Results (More ROAS) from Your Advertising Budget

Remember that ROAS is determined by dividing the total revenue produced by your ads by the cost of those ads. If revenue increases – but ad spend remains the same – your ROAS will grow.

How do you accomplish that feat? It’s simple: conversion rate optimization.

  • Use CRO to remove friction and convert more of those who click on your ads into paying customers
  • Use CRO to get those who do buy to buy even more (increase average order value)
  • Use CRO to diminish cart abandonment, meaning more prospects make it on through to make the purchase

Those are three of the primary ways CRO can boost ROAS. There are multiple touch points that occur between the ad and the payment. You can use CRO to ‘grease the gears’ at any or all of those potential ‘stuck points’ to get more sales.

At The Good, we use our conversion assessments to quickly identify the areas that will most benefit from CRO efforts, then we work on those first to get maximum results in the least time.

By removing barriers to the sale, streamlining the user experience, and making it easier for visitors to buy, we’ve seen ecommerce websites grow ROAS to get 10:1 returns and better.

It’s not unusual for The Good to contract with a client who is ready to give up on PPC advertising altogether. “PPC advertising just doesn’t work” is a common complaint we hear.

After we apply sound conversion rate optimization principles to landing pages and checkout procedure, then give PPC another try, the results can be spectacular – leading management to decide advertising “really does work” after all.

You Can Get Better Results from Your Advertising Spend

By determining your present ROAS, then incorporating the principles of conversion rate optimization, you can improve your ROAS.

If you’re not sure where to begin, schedule a 15-minute call with one of our CRO specialists. We’ll help you uncover the stuck points limiting your ecommerce sales. Then, we’ll help you get rid of the friction and unclog your sales funnel.

Everybody needs a little help now and then.

Get your ecommerce website on the path to a healthier ROAS.

Resources:

About the author: Jon MacDonald is Founder and President of The Good, conversion rate experts who deliver more revenues, customers, and leads. Jon 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. Connect with Jon on Twitter.

Leave a Reply

Your email address will not be published. Required fields are marked *