Serving to Information Advertising and marketing Finances Spend
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If you run digital ads on Twitter, Amazon, or Google, chances are you’re tracking the clicks on your campaign. While clicks are important, cost per click isn’t the most valuable metric.
The metric marketers should include Return on Advertising Spend (ROAS) in any reporting. By reviewing campaign ROAS, you can get deeper insights into digital ad spend and improve the quality of marketing budget decisions.
What is ROAS?
ROAS is an attribution metric that links revenue to advertising spend. It represents the conversion value to advertising costs as the ratio of product income divided by advertising costs for the product (or expenses).
So let’s say you spent $ 100 in revenue on an ad group and $ 25 on digital advertising. Your ROAS is $ 4 per dollar spent.
The goal of Return on Ad Spend is to achieve the highest possible ROAS value. A high ROAS shows that the conversion value is worth the advertising costs, as the revenue exceeds the costs over the course of the campaign.
ROAS is tied to social media advertising, so you will likely see the metric in the ad manager for a particular platform. However, each platform has a slightly different take on metrics, although the primary purpose for the ratio – revenue / advertising budget spent – is the same. For example, Facebook has a website purchase ROAS, which is the conversion value on the user’s website divided by the total amount spent on Facebook ads.
Another example treats ROAS as a benchmark. Google offers a target ROAS for Google Ads that marketers can use to create a smart bid strategy that aims to generate more conversion value or revenue with a target ROAS. However, there are a few important prerequisites for using Target ROAS. A requirement is set conversion values and 20 conversions in a minimum of 45 days. Marketers should also allow for a budget buffer roughly twice the daily ROAS budget to cover any fluctuations in daily expenses.
Related article: A new Facebook ad metric to fit cross-channel experiences
Why ROAS is important to marketing
Choosing ROAS is important for campaign analysis because marketing is treated as an investment rather than an expense, as is the case with cost-per-activity (CPA) metrics. The cost per click is a reminder to the marketing team that they are spending money on each click, but it doesn’t remind the team to ask another important financial question: How much revenue generating activity is there associated with that cost?
ROAS answers this question and offers a better comparison of values within each ad group. It is possible to get a high conversion and still get a low ROAS. The cost per conversion of two campaigns can be the same, for example $ 10 per click. However, if each campaign is for two different products, each with different revenues, the ROAS for one will be higher, which indicates a campaign of higher value. Examining the ROAS with a CPA metric shows a broader financial picture, which can be used to determine which campaigns should be further invested in.
Related Article: Stop Over-Promising Content ROI and Start Delivering Content ROE
Schedule an ROAS Analysis
To do your own ROAS calculation, you can export the campaign data from any ad manager to a CSV file and then import the sheets into an Excel spreadsheet or a Google spreadsheet. You can then create a special sheet linked to the fields on these tabs and calculate the ROAS formula.
A campaign review can now quickly provide better insights into the amount of marketing spend that will attract your desired audience. Campaigns that appear expensive can be more than paying off if the products in question have a high profit margin and the ROAS is high.
In the screenshot example above, we can see the total ad spend, total revenue and ROAS from four different campaigns. Campaign D sales are the lowest of the four campaigns, but the ROAS is similar to Campaign A, which has the highest sales among the campaigns. If every campaign is promoting the same product or service, you can argue with a manager looking to cut the budget that the return on the high-spend campaign is as effective as the one with the lowest sales. In this case, it would make the most sense to cut campaigns B and C as their combined ad spend is higher than A and D combined, but both have a lower ROAS.
The ROAS analysis is a great starting point for deeper conversations about which campaigns need to be refined, which campaigns to invest in, and which campaigns to retire.
Related article: How to Deliver Credible Marketing Pipeline Forecasts
Social commerce will increase the need for ROAS analysis
The explosive growth of social commerce, fueled by the restrictions of the COVID-19 pandemic at home, is sure to raise more questions about which social media campaigns are affecting sales. EMarketer expects US retail social commerce revenue to grow to $ 36.09 billion this year, an increase of 34.8%. Due to an expected increase in sales, the forecast growth rate has also been updated from 19% to 37%.
Marketers who rely on social media commerce start by viewing Return on Ad Spend metrics to get the most out of their limited social media marketing budgets.
Pierre DeBois is the founder of Zimana, a digital analytics consultancy for small businesses. He reviews data from web analytics and social media dashboard solutions and gives recommendations and web development measures that improve marketing strategy and business profitability.
