I always love articles that start by laying down some cold hard statistics. For example, the percentage of online advertisers who track their return on ad spend (ROAS). Unfortunately, I couldn’t find a reliable report that I felt confident sharing. So instead, I’ll rely on some internal data.
Over the past two years, I’ve personally audited over 200 SaaS and eCommerce ad accounts, some with millions in annual spending. Sadly only about 22% of these accounts were tracking ROAS. Of those, less than half were accurately tracking ROAS.
Shocking… I know ?
Clearly, there’s confusion about return on ad spend and how to track it. So if you’re wondering what I’m even talking about right now – you’re not alone.
In this article, I’ll explain ROAS, why it’s important, and show you how to improve it.
Let’s get started!
What is ROAS?
Return on ad spend (ROAS) is a ratio that represents how much revenue your ads generate per dollar spent on advertising.
For instance, let’s say you spend $100 on Facebook Ads and generate $500 in revenue as a result. Your ROAS would be 5:1 because for every one dollar spent there are five dollars in return.
On the other hand, if you spent $500 on advertising and only made $100 back, then you’d have a negative ROAS of 1:5. Sometimes negative ROAS is also represented as a decimal or percent. In this case, that would be .2 or 20% since you only made back 20% of your initial investment.
Of course, the goal is to get the highest ROAS possible, but you’ll need to understand how you calculate it before you can do that.
How Do I Calculate ROAS (Return on Ad Spend)?
If you have proper tracking installed on your website, you shouldn’t need to do much calculating. Facebook Ads, Google Ads, and most other ad platforms can track and report ROAS automatically. Google Ads even has a built-in bid strategy to optimize for maximal return on ad spend.
You can also calculate ROAS manually. Either way, the formula is straightforward: just divide the revenue generated by ads’ cost.
How ROAS is calculated ☝️
Return on ad spend is undoubtedly one of the most crucial KPIs. Calculating and monitoring ROAS can also have several indirect benefits. It can help you spot ad fatigue, reveal low-quality conversions, and help inform your overall strategy. We’ll cover this in more detail later in this article.
However, it doesn’t give you the full picture. That’s the critical difference between ROAS and return on investment (ROI).
How is ROAS different from ROI?
ROAS is different from ROI because ROAS doesn’t account for the company’s actual profitability. ROAS only measures ad spend and the resulting revenue.
Don’t worry – we’ll help you make sense of everything.
Making $5 back for every $1 spent sounds great, but that’s assuming there are no other costs. Most businesses have several additional costs to consider before calculating an actual return on investment.
Let’s go back to our original example, where you spent $100 on Facebook Ads and made $500 in revenue. Except for this time, factor in the cost of goods.
Imagine you’re selling Christmas lights for $50 each. Including labor, it costs you $25 to manufacture and package each box of lights. This means you only profit 50% or $25 per box of lights sold. Then you spent $100 on Facebook Ads, which chops your profits down to $150.
Now that you know your profits, you can calculate your ROI. First, divide profits by your total investment, then multiply by one hundred to get your ROI as a percentage.
It should look something like this:
Net Profit divided by Investment Cost then multiply by 100%
Unlike ROAS, where anything less than 100% is a loss, 42.8% ROI still means you made quite a bit of money.
Why Does ROAS Matter?
Return on ad spend is a better profit marker than conversions and easier to calculate than ROI.
ROI and Profitability are important for just about every business, but crunching the numbers in a spreadsheet every day isn’t realistic. ROAS can help you gauge how profitable your advertising efforts are in real-time. This level of insight allows you to optimize campaigns and maximize results quickly.
For example, let’s say your business needs to hit a 3X ROAS to break even. If you’re ROAS drops below that number, you know your ads are losing the company money. On the other hand, if you have a 5X ROAS, your ads are basically printing money. Keep it up!
What is a good ROAS?
According to one study, the average ROAS across all industries was 287%. So does that mean anything above average is good?
Unfortunately, there’s not a universal answer to this question. Anyone who tells you differently is lying…
Or just misinformed ?
Anyway, if you’re looking for a rule of thumb, 4X or above is typically a good sign. However, the only way to know for sure is to know your numbers. A good return on ad spend varies depending on profit margins, company goals, and campaign type. In the next few sections, we’ll breakdown how and why each of these factors affects your ROAS.
Profit margins will vary depending on the company. Some companies sell big-ticket items with huge margins, others sell inexpensive items with slim margins, and vice versa.
For example, a company selling high-dollar medical equipment might only need a 2-3X ROAS to be extremely profitable. In comparison, an apparel company may require a 5-6X ROAS to be profitable.
In other words, you need to know your margins before you can decide on an appropriate ROAS. Typically larger profit margins allow for a lower ROAS.
Every business has unique goals. Some companies may value a high ROAS more than others. For example, venture-funded startups might value customer acquisition more than profitability. At these companies, a high ROAS might take a back seat to conversion volume.
That doesn’t mean you should take a page from their book. In fact, you shouldn’t use data from other companies (even in your same industry) to set ROAS goals. Set goals based on your company’s internal data, measure your progress, and continue to set new benchmarks.
Not all of your campaigns will be aimed at direct purchases. Brand awareness and content promotion campaigns feed the top of your funnel, but may not result in sales. This means some campaigns may not record a return on ad spend at all — that’s okay.
For example, you could use Facebook ads to promote your blog posts or downloadable eBook. Both of these campaigns are worthwhile. They open the door for retargeting and may increase your ROAS indirectly.
Simply put, a lower ROAS doesn’t always mean your campaign is failing. Brand awareness, content promotion, and other top-of-funnel campaigns still contribute to your success. Users who are aware of your brand are more likely to interact with future ads and eventually purchase. Keep this in mind before ruling out a campaign based on ROAS alone.
Using ROAS to Optimize PPC Lead Generation
Your business’ advertising goals may not be direct purchases. In this scenario, they won’t automatically record a return on ad spend. This is the case for most companies that use lead generation and rely on a salesperson to close the sale after.
However, lead-gen companies can still track ROAS; you just have to be a little more creative.
There are three options to do this:
- Record the number of leads that turn into sales. Then, assign the correct value to each sale then run a manual ROAS calculation.
- Set a static conversion value based on sales history. For example, you close 50% of your leads, and each sale is worth $500. You can assign a static value of $250 to every lead and get a rough estimate of ROAS.
- Use a CRM that integrates with your ad platforms. Some CRMs can integrate directly with your ad accounts and accurately track ROAS with fewer manual entries.
Because it’s a bit more work for lead-gen-focused businesses to calculate ROAS, many choose to skip it altogether in favor of tracking ROI. This oversight can be problematic. A low ROI could result from many factors, including high overhead not related to advertising costs. Therefore, you lack essential data when you try to diagnose and correct issues relating to profitability. Track ROAS and ROI separately to help pinpoint the areas of your business that need improvement.
Is Return on Ad Spend Better Than Click-Through Rate?
ROAS and CTR aren’t superior to the other. In fact, they work quite well together.
Click-through rate (CTR) is the percentage of people who clicked on your ad out of the total number of impressions.
CTR tells you a few things about your ad:
- Relevance to the keywords or search terms
- How well targeted or engaging your ad is
- The attractiveness of your ad (for shopping or display ads)
Ultimately, CTR can help you determine ad performance. However, it’s not a signal of conversions or profitability like ROAS.
CTR is more useful as a troubleshooting metric than a key performance indicator, but don’t ignore it. CTR It can help you find and fix problems leading to better overall performance.
For example, your ad could get 5000 clicks and still have a 1:5 ROAS. In this case, you need to diagnose why your conversion rate is so low, despite all the attention the ad is getting. Using ROAS and CTR metrics together can help you find a solution.
For instance, a combination of high CTRs coupled with low ROAS generally points to a landing page issue. This level of insight allows you to turn your focus towards optimizing your landing pages.
To summarize, a low ROAS doesn’t necessarily mean you need to edit your ads. First, you need to review your CTR if your ads all have high CTRs and a low ROAS. Then, you can rule out most issues with your ad accounts. As we already mentioned – there are other factors to consider, like your landing page performance.
How to Improve your Return on Ad Spend
Imagine you set up your campaigns and have all your tracking in order. A week or two passes, and you decide to check performance. Unfortunately, your ROAS is less than 1.00 – you’re losing money.
First, take a deep breath and try not to panic, and pause all your ads. Even if something has gone wrong, there’s a good chance you can still save your campaign.
To help you get you back on track we’ve compiled 7 expert tips for maximizing your ROAS.
#1 – Review Tracking Accuracy
Before you make any drastic changes, you’ll want to double-check your tracking. A broken pixel could be missing valuable conversions or miscalculating conversion values.
Accurately tracking ROAS is super important. Without it, you could accidentally shut down a highly successful campaign.
Trust me. You don’t want to be one of those guys ☝️
So take a few moments to give your tracking a thorough inspection.
Here are the steps we recommend taking:
- Make sure all your tracking tags are set up correctly.
- Consider changing your attribution model so partial credit is applied across all ads that contributed to the conversion process.
- Isolate paid traffic costs and the resulting purchases to perform a manual ROAS calculation.
After following these steps, you should be able to rule out any inaccuracies in your tracking. If everything checks out and your ROAS is still low, then keep moving down this list.
#2 – Optimize your Landing Pages
For the most part, conversions have more to do with what happens after someone clicks on your ad. This means optimizing your landing page is the fastest way to increase conversion rates. High conversion rates lower cost per acquisition, increase conversion volume and can improve ROAS.
If you’re not using a landing page then that’s the first place to start. You can use our handy landing page checklist to make sure everything is set up correctly.
Simply put, the goal here is to drive more conversions at a lower cost. Doing so should quickly and drastically improve your ROAS.
#3 – Fight Ad Fatigue
When you launch new ads your campaign might rise to 5-6X ROAS for several weeks before gradually decreasing. This type of rise and decline is a tale-tale sign of ad fatigue.
Ad fatigue happens when your audience gets bored of seeing your ads. It sounds simple, but trust me, it’s one of the biggest ROAS killers.
Lucky for you, it’s easy to fight. All you have to do is keep fresh new ads coming down the funnel.
That should get their attention!
The trick is knowing when to give your ads a refresh. Changing out ads too soon may not provide much benefit and could even hurt performance.
So before you consider a refresh make sure your ads have completed the learning phase and your ROAS is decreasing.
We recommend setting a minimum ROAS for each of your campaigns. This will make it easier to assess if a refresh is needed.
#4 – Improve your Targeting
It’s hard to sell hamburgers to a vegan. Likewise, it’ll be tough to sell tofu to a carnivore. The same is true for your PPC ads.
Even the best ads won’t perform well if you show them to the wrong audience. So if your ROAS is low and you’ve checked off the first three tips in this list, it’s time to fix your targeting.
First, you need to know who your audience is before you can zero in on them. Several tools can help you research your audience and create customer personas.
Here are a few of our favorites:
- Hotjar Surveys – This tool lets you ask your website visitors anything you want and collects the answers in an easy-to-use dashboard.
- Facebook Audience Insights – View the interests and demographics of people who already follow your business page.
- Remesh – Have a conversation with thousands of customers, ask questions, gather feedback, and easily review the data.
Most platforms offer thousands of detailed targeting criteria. Identifying your ideal audience is the only hurdle. Then it’s just a matter of checking the right boxes.
Bonus Tip: Check out our comprehensive guide on Facebook ad targeting. It’s guaranteed to give your ROAS a boost.
#5– Set up Retargeting Campaigns
Who’s the most likely to click on your ads and convert?
People who are already familiar with your brand. This includes email subscribers, past site visitors, and people who’ve engaged with your social media. These people know who you are and understand your products and services better than cold traffic. For this reason, they’ll be more likely to convert.
In fact, according to Criteo, retargeted visitors are 43% more likely to convert. Furthermore, a study by WordStream showed retargeting campaigns produced a 47% lower cost per conversion.
Simply put, retargeting is one of the most powerful strategies to maximize ROAS.
Bonus Tip: Retargeting on the right platform is equally important. For example, B2B advertisers will have better luck using LinkedIn Retargeting than they would with TikTok.
#6 – Increase Average Purchase Value
The idea here is to increase conversion value while keeping your costs the same. When done correctly, it’s a surefire way to improve ROAS.
Here are a few of our favorite tactics:
- Add an upsell on checkout.
- Offer a more expensive bundle instead of a single item.
- Free shipping for larger purchases (i.e., over $100)
- Discount thresholds (i.e., Spend $75 and get $10 off)
In addition to increasing the initial purchase price, you could work to improve customer lifetime value. This also has several competitive advantages. If your customers are more valuable than the competition, you can afford to spend more acquiring them.
#7 – Lower the Cost of Your Ads
If your cost per click is $10 and you’re able to chop that in half to $5 you could double your ROAS. That’s huge!
Sadly, it’s not always possible. If it is possible, you might have a long journey ahead. That’s because there are many different strategies and tactics to lower CPC. Too many to fit in this article.
Here are my two favorite techniques for slashing CPCs:
Negative Keywords, Placements, and Audiences
Find and remove keywords, placements, locations, audiences, and other targeting criteria that doesn’t meet your performance standards. First, I recommend using filters to identify keywords that spent money but haven’t driven any conversion value. Next, add these keywords to your negative keyword list and repeat this process with your other targeting criteria. Removing waste will free up your ad spend and lower your average CPC.
Improve Relevance Factors
Google Ads analyzes three data points to score advertisers: expected click-through rate, ad relevance, and landing page experience. Collectively these create your Google Ads Quality Score. The higher you score from 1-10 the higher you rank and the less you pay.
Similarly, Facebook Ads also uses three rating systems: Quality Ranking, Engagement Rate Ranking, and Conversion Rate Ranking. Improvements to these scores result in your ad being shown more often at a reduced cost. You can read more about this in our 136-point guide to Facebook relevance score.
For more in-depth explanations and how-to guides, give these articles a read:
Return on ad spend tracks one thing: how much money you made from ads vs. what you spent on them.
So if making more than you spend is important to you, improving ROAS should be your priority. Especially for companies whose online sales have trackable conversion values.
However, you shouldn’t forget about other stats. The real value of ROAS tracking is its ability to provide more insight into your account when used alongside other metrics.
Conversions, conversion values, and many other metrics play a vital role in your advertising success. You can’t troubleshoot your advertising if you don’t know where to start. Use metrics like CTR that signal ad performance. Similarly, look at conversion rates when you need to check in on landing page performance.
In summary, the most successful advertisers take a holistic view of advertising metrics. This approach will help you spot opportunities and help you achieve the best results.
Nice work, you’re a ROAS master!
Well, that wraps things up for now. Hopefully, we’ve answered all of your questions about ROAS. If we left anything out, be sure to let us know in the comments.