Return on Ad Spend (ROAS) is a valuable metric for advertisers, as it provides insight into the profitability of a campaign and helps to inform decisions around budget allocation and campaign optimization. Advertisers aim to achieve a high ROAS, as this indicates that a specific campaign is generating a significant return on investment.
What is ROAS?
ROAS, or Return on Ad Spend, is a key performance indicator in digital advertising that measures the return on investment for an ad campaign. ROAS is an easily-interpretable percentage, calculated by dividing the revenue generated from an advertising campaign by the cost of the campaign. It is typically expressed as a ratio, with the resulting figure representing the amount of revenue generated for every dollar spent on advertising.
ROAS is important because it gives valuable insight to marketers on their hard advertising costs as opposed to a soft, vague picture of how effective their advertising is.
This metric is best interpreted with others like Cost per Acquisition (CPA) or Cost per Lead (CPL) to give a fuller picture of how much your advertising costs are contributing to overall spend on customer acquisition. In other words, it helps you understand the quality of your ads and how much they are contributing to netting new customers.
How is ROAS calculated?
The calculation for ROAS is fairly simple, as below:
ROAS = Revenue attributed to ads / Cost of implementing those ads
For example, if a company spends $1,000 on an advertising campaign and generates $5,000 in revenue, the ROAS would be 5:1, or 500%. This means that for every dollar spent on advertising, the company earned five dollars in revenue.
ROAS is a powerful metric because you can make it as granular as you need to understand where you’d like to allocate your advertising budget. There are several dimensions you might consider:
- Staff costs: This might include the amount you pay to any staff managing the campaign, potentially as a percentage of their total salary. After all, it’s likely they don’t spend their entire working year managing a single campaign. However, if you’re looking for the global ROAS (across all the ads your business is running), you might include the full salary for your entire advertising team.
- Vendor costs: If you run your ads using third-party vendors or affiliates, you might include the costs from these external parties in your calculation.
- Ad spend in isolation: If you wish to understand purely how much you’re getting back for ad spend alone, you can break your spend down by campaign, platform, or channel to understand where your ads are performing best.
ROAS benchmarks: What is a good return on ad spend?
As a general rule, the higher your ROAS, the better. A large return on ad spend indicates that you are getting a lot back from what you put into a campaign, so the more you get in return, the better for long-term profits. Generally speaking, if you’re seeing a 3:1 ratio (Organic) or 1.5:1 (Paid) in your ROAS, you’re most likely doing well.
Industry benchmarks are helpful here, and knowing how those benchmarks intersect with ROAS averages across different channels will inform you of your campaign’s level of success. Note that a good SEO strategy is your best friend when it comes to increasing your ROAS, as the financial investment in an organic SEO strategy is much lower than a paid campaign (with the potential for a comparable return).
For now, we’ll just focus on Paid ROAS. Let’s review some top performers and low-runners as of 2023.
ROAS by industry
2023 statistics are showing some consistent high performers in the Automotive, Financial Services, Medical, Real Estate, and Higher Education fields. Interestingly, there are those who are beginning to show signs of strong performance, including Aviation, Biotech, Cybersecurity, and Solar Energy.
In descending order, here are some of the top performers in ROAS for 2023:
- Construction: 2.25
- E-commerce: 2.05
- Software development: 1.90
- Higher education: 1.90
- B2B SaaS: 1.70
- Transportation & logistics: 1.60
*Data sourced from FirstPageSage.
ROAS by channel
From 2023 data, we can see that paid social media advertising and well-nurtured affiliate partnerships are key to advertising success. However, the ROAS across all channels is still well-represented. In descending order of best performers, we have:
- Influencer marketing: 3.45
- LinkedIn Advertising: 2.30
- Facebook Ads: 1.80
- Online PR: 1.60
- PPC/SEM: 1.55
Data sourced from FirstPageSage.
Of course, not all campaigns are designed to generate immediate revenue. Many marketers combine analysis of ROAS and Return on Investment (ROI) to understand how their brand awareness campaigns may be contributing to increased revenue later in the funnel.
How to increase return on ad spend?
For marketers unhappy with their ROAS, there are many ways to inject new life into a campaign to push this key metric up. Here are some tips to try and boost ROAS:
- Lower ad spend: Lowering ad spend is a tried-and-true way to reset a campaign and observe if cost is your dependent factor. Keep an eye on performance after lowering your ad spend to see if the number of converting customers changes. If it remains high in comparison to a lowered ad spend, this will immediately bump your ROAS.
- Narrow focus: Especially with limited budgets, narrowing your focus is key to driving up your ROAS. Get in touch with your target audience and observe where they are already interacting with your brand. Are they particularly drawn to LinkedIn as a corporate audience, or are your customers waiting on the Google SERP?
- Review your ads: As always, content is king. Consider whether your advertising has clear messaging or if it isn’t landing with your target audience. High return on ad spend is dependent on your customers converting, which relies on your ad copy resonating with their needs.
- Optimize online experience: Ads are just the gateway, opening the door for your customers to interact with your brand. Regardless of where your ads are in your sales funnel, the experience your customers have on the landing page they find is crucial. After all, a positive landing page experience drives conversions like nothing else.
- Rethink keyword strategy: If you aren’t using negative keywords, your ads might be ending up on irrelevant pages, thus driving higher ad spend while reducing the number of customers that convert from said ads. That’s why using negative keywords is a powerful way to refine where your ads are being served, as it tells the system where not to spend money.
ROAS vs ROI
Return on Ad Spend (ROAS) and Return on Investment (ROI) are both metrics used in digital marketing to evaluate the effectiveness of advertising campaigns, and both are represented as either ratios or percentages. Their key difference lies in their scopes.
- ROAS measures only the revenue generated from an advertising campaign relative to the amount spent on the campaign. It is a metric that specifically focuses on the performance of the advertising campaign itself, rather than the broader business performance. ROAS is expressed as a ratio, with the resulting figure representing the amount of revenue generated for every dollar spent on advertising.
- ROI, on the other hand, measures the overall profitability of all business investments, including the cost of goods sold and any other overhead costs. ROI is a more comprehensive metric that considers the impact of the advertising campaign on the business as a whole, rather than just the advertising campaign’s performance. ROI is typically expressed as a percentage, with the resulting figure representing the return on investment relative to the initial investment amount.
Both metrics are valuable in helping marketers make informed decisions about how to allocate their resources and optimize their campaigns. In fact, understanding both and comparing the two creates a fuller picture of marketing investments relative to the business’ long-term vision. More specifically, a disproportionately small ROAS within the larger picture of the ROI indicates that something is going wrong with advertising.
As with all other advertising metrics, understanding ROAS as part of an ecosystem rather than in isolation is essential. Think of it as an indicator of how well your ad spend is working to drive customer uptake, as well as one of many levers to pull to increase campaign success, and you’ll be well on your way to using ROAS to your benefit.