Advertising is one of the most important investments you can make in your business. It can help you increase brand awareness, generate more revenue, and grow your business.
However, you need to ensure that the revenue gained as a result of your advertising campaigns is higher than the amount you’re spending on them. Otherwise, whatever growth you achieve won’t be sustainable in the long run.
In this article, we’ll take a look at return on ad spend (ROAS), which you can use to track and evaluate your advertising costs. We’ll also explore a few ways to make the most of every dollar spent on your advertising efforts.
Return on ad spend (ROAS) is a marketing metric that measures how effectively a digital advertising campaign is generating revenue for a business.
When you know how much revenue a marketing campaign generates, you can figure out the return on ad spend for that specific ad campaign. The higher your ROAS, the more profit generated from your ad campaigns.
Tracking ROAS helps businesses calculate which marketing channels are working best and guides the creation of future campaigns.
How to calculate ROAS?
Calculating ROAS is a really simple process. There are two crucial pieces of information you need to calculate ROAS:
- Direct revenue generated by the ad campaign
- The advertising costs associated with the campaign
Then, you plug both numbers into the ROAS formula:
ROAS = Revenue from Ad Campaign / Cost of Ad Campaign
Let’s check out an example!
Say you spend $1,000 on an ad campaign, and it brings in $2,000 of revenue. To perform the ROAS calculation, you just need to divide 2,000 by 1,000, which means your ROAS is $2 (or 2:1). This tells you that you generated $2 of revenue for every dollar spent on the ad campaign.
What is a good ROAS?
Business owners often wonder what the target ROAS for their ad campaigns should be.
A rule of thumb is that a good ROAS is about $4 revenue for every $1 spent on ads (or a 4:1 ratio). This ensures that the revenue generated is enough to leave you with healthy profit margins even after you pay for your ad spend, vendor costs, and other operating expenses.
Of course, what counts as a “good” ROAS depends on the industry, the company, and the size of the business. One ecommerce business might need to achieve a ROAS of 10:1 to stay profitable, while 2:1 might be an acceptable ROAS for another.
How to improve your ROAS?
Now that we have a good idea of what goes into calculating ROAS and what your target ROAS should be, it’s time to see how you can improve it.
1. Lower your ad campaign spend
The most straightforward way to improve your ROAS is to have low advertising costs. However, you don’t want to compromise your business by reaching less of your target audience because you’re spending less on your ads.
Instead, your goal should be to lower your ad spend while achieving similar results.
The trick is having a good marketing strategy that helps you make the most revenue from your ad spend. Improving efficiency is the best way to lower your advertising costs.
Here are a few ways you can improve your performance:
- Improve your bidding strategy: Many digital advertising platforms use a bidding system to sell ads (such as Google Ads, Facebook, or here is a Linkedin bidding strategies guide). You can lower your advertising spend by finding ad spots that not many people are bidding for.
- Target the right audience: You can spend less on ads if you’re more efficient at showing them to the right people. Audience targeting allows you to avoid wasting your ad spend on advertising to people who have no interest in your products.
- Target the right keywords: You should tirelessly optimize your blog and ad copy so that it shows up when people search for keywords that are related to your business.
2. Optimize your landing pages
Once people click on your ad campaign, the job is only half done: you still need to convince them to move to the next step of your sales funnel. This is where your landing page comes into the picture.
A well-designed landing page will increase your return on ad spend by leading to more conversions and more revenue.
It’s a good idea to A/B test your headlines to make sure that each of them is optimized. For example, you could A/B test your unique selling proposition to find out which one resonates with visitors and achieves the highest possible conversion rate.
BlendJet tried two different headlines to promote their product: “The Original Portable Blender” vs “The First Self-Cleaning Blender.”
Here’s a step-by-step guide on how to test your landing page headline with different value propositions.
3. Earn more revenue from each customer
It’s far cheaper to convince an existing customer to buy from you again than it is to acquire a new customer. This is why increasing customers’ lifetime value is a good way to improve your ROAS.
One clever strategy is to increase the average order value (AOV) of each purchase. You can do this in a few ways:
- Upselling: This is a marketing tactic where you encourage customers to purchase a premium version of a product with a higher price.
- Cross-selling: In cross-selling, you offer complementary products or bundles to encourage customers to order more.
- Free shipping offers: You can use a free shipping offer to incentivize website visitors to order more in order to qualify for free shipping.
You can increase revenue by using one of the tactics described above or by combining them.
Get started with these templates to increase the average order value:
4. Provide a personalized journey
You can use personalization to create a unique customer journey for each customer. Relying on one-size-fits-all messaging often means digital marketers have to settle for sub-4% conversion rates and a low ROAS. On the other hand, personalizing your website is a nearly guaranteed way to improve both your conversion rate and your ROAS.
Some ad platforms have limited personalization options, but if you want to get the most out of personalization you’ll need a dedicated tool like OptiMonk.
Check out this guide to learn more about website personalization.
Keeping track of your ROAS is an essential part of running an online business. You can’t just spend lots of money on marketing without knowing how much money each specific ad campaign is bringing in.
What are some strategies you’ve used to improve your ROAS? Let us know in the comments!