What is Return On Ad Spend and How to Measure it?

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Want to know the effectiveness of the digital campaign you are running? If yes, return on ad spend or ROAS are marketing metrics that can be used to measure it. With ROAS, you can know whether what you spend is commensurate with what you receive.

ROAS stands for Return on Ad Spend. This term itself is usually used to determine the effectiveness of a digital campaign. So by using ROAS, you can find out whether the amount spent is commensurate with what is received.

To find out, there is a way to calculate ROAS that you should learn. Because, without clear calculations, you won't know how effective the campaign you are running is, otherwise this could be detrimental to the company.

Excerpted from Bigcommerce, Corporate Finance Institute, and The Balance SMB, the following is an explanation of ROAS. Read this article to the end to really understand, OK!

What is Return On Ad Spend?

What is Return On Ad Spend

In the world of digital marketing, there are various methods and metrics that can measure the success of an advertising campaign run by a company. Some metrics that are generally calculated in digital marketing are impressions, CTR (Click-Through Rate), and conversion rate.

Apart from the metrics mentioned, there is also another term called ROAS (Return On Ad Spend). ROAS is a marketing metric that measures the income obtained from all costs usually incurred to run an advertising campaign. Simply put, in this metric, advertising is like an investment that can bring returns. So, to find out whether the ad is effective or not, it needs to be evaluated using the ROAS metric.

Simply, Return on ad spend or ROAS is a way to find out the effectiveness of the digital campaign being run. By finding out ROAS, you will know more about the performance of each ad placed and how it affects the company.

The term is like when investing in gold, you definitely hope that the selling value will continue to rise so that the money, calculations and energy spent are worth it, right? Well, it's the same with ROAS.

Companies certainly need to evaluate whether the results obtained are commensurate with the effort and costs incurred. You can measure ROAS at various levels on your Google Ads account. This starts from the account itself, one of the campaigns created, the campaign group as a whole, and so on.

When combined with customer lifetime value (CLV), you can better understand which strategies are effective and what budget is needed. So, the marketing and advertising team will have a clearer direction, and the campaigns they run will certainly be more effective.

What is the Importance of ROAS?

As already mentioned, in digital advertising there are many metrics that can be measured. But is ROAS important? According to the Madgicx page, ROAS is needed to dig up comprehensive information to determine what changes need to be made to optimize campaign performance.

So, ROAS works by examining each campaign one by one helping businesses to know the type of advertising, so they can scale it to maximize the results. Not only that, ROAS can also determine what changes need to be made to optimize the performance of the campaign.

As is known, advertisements campaigned by companies aim to increase brand awareness. So, when you don't calculate ROAS, you can't monitor how effective the ads you are running are in bringing in revenue.

Quoting from appsflyer.com, the following are the reasons why ROAS is important:

1. Choose the best marketing channel

By measuring ROAS across various advertising channels, such as e-mail, social media, and search engines, a digital marketer can determine which channels provide the most profits.

Thus, budget allocation can be more effective because it can focus on channels that provide the best results, and eliminate channels that do not provide significant results.

2. Optimizing ads

Comparing ROAS across different creatives is useful for digital marketers to optimize their ads. For example, they can identify which words, images, or messages best resonate with their target audience, and then create more such content.

This helps refine advertising strategies and maximize their campaign performance.

3. Makes it easy to create reports

ROAS makes reporting and communication easier because the metric provides a snapshot of the financial results of advertising efforts, which even the layman can understand.

Therefore, reports created using ROAS can be clearer and more concise, thereby helping decision making with stakeholders.

4. Gain data-driven insights

By analyzing ROAS data and understanding what works and what doesn't, digital marketers can gain insights to develop future campaigns. This data-based approach helps make decisions more objectively so that you can save costs and get maximum results.

Apart from that, real data and evidence in the form of ROAS makes it easier for digital marketers to support an idea or proposal addressed to management or stakeholders.

How do you Calculate ROAS?

How do you Calculate ROAS

As previously explained, ROAS functions to calculate the effectiveness of a campaign. To calculate it, several methods are needed, one of which is preparing data, namely data on the gross income (gross avenue) of an advertisement and data regarding the amount of costs incurred to make the advertisement. When you get these two data, here is the formula for calculating ROAS.

ROAS = Gross Avenue : Ad Spend

For example, here is a clearer picture of how to calculate ROAS.

A company promotes several products through Instagram Ads and Google Ads within one month. After a month, the company wants to calculate the amount of revenue obtained from online advertising campaigns that are run using the ROAS formula.

The first thing to do is calculate the total costs incurred to run the online campaign. For example, the company spent $4,000 on advertising. From this advertisement, the company managed to get revenue of $16,000. So, how much is ROAS?

ROAS = Gross Avenue : Ad Spend
ROAS = $16,000 : $4,000
ROAS = $4,000

So, the ROAS from advertising is $4,000 or the equivalent of 4:1. What does it mean? This means that for every $1,000 a company spends to advertise on Instagram Ads or Google Ads, the company makes a profit of up to $4,000.

In conclusion, if ROAS is equal to or above 100%, it is certain that the advertising is effective and provides profits for the company. The company's job is only to re-evaluate whether the advertisement is worth continuing or not.

Ways to Increase ROAS

It is possible that when you calculate ROAS, the results given are not in accordance with what was expected. So, what are the right ways or tips to increase ROAS?

1. Reduce advertising spending costs

To increase ROAS, you can start reducing advertising spending costs. This cost reduction can be done by reducing processing costs, narrowing the target audience, and the most effective way is carrying out A/B testing.

2. Pay attention to accuracy

When using ROAS, it is important to pay attention to the numbers it produces. Make sure that the numbers are accurate by paying close attention to the data used to calculate the metrics.

3. Find out about issues that are not related to the campaign

Low ROAS can also be caused by several factors, one of which is issues in the campaign. In some cases, it has been shown that the ROAS is low, but sales are high, this can happen if the product price is too low.

Meanwhile, if the ROAS is low, but the CTR is high, the digital ad is indicated by several issues, such as a landing page that is not of good quality, the product price is too high, the checkout process is too long and complicated, and so on.

What is a good ROAS Percentage?

Reporting from appsflyer.com, a good ROAS number can be subjective and depends on various factors. However, in general, positive ROAS is considered good and indicates profitability.

According to bigcommerce.com, while there are no exact numbers, a commonly used benchmark is a 4:1 ratio, meaning $4 in revenue for every $1 spent on advertising. However, a good ROAS can vary based on the context and specific goals of each business.

For example, a start-up company with limited funds may aim for higher margins, while a growing online store may pay higher advertising costs.

Therefore, it is important for a business to evaluate their own financial goals, profit margins, and industry standards when determining a good ROAS for their circumstances.

Do you know what ROAS is?

ROAS is a marketing metric that measures the income obtained from all costs usually incurred to run an advertising campaign. With ROAS, companies can calculate the effectiveness of the digital advertising they are promoting.

The higher the ROAS, the better the return on investment from an advertising campaign. This shows that the campaign is effective in generating revenue and that the advertising efforts are profitable.

With this information about ROAS, XYZ Fashion boutique can evaluate the success of the campaign and make the right decision. They can assess the profitability of various advertising channels and optimize advertising creative and targeting strategies so that advertising budgets can be allocated more efficiently.

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