The goal of online advertising is to drive sales for your business. Period. This is particularly true when it comes to paid search because the users you are targeting are, more often than not, lower in the funnel. But, just because you've been able to identify and target users that are lower in the sales funnel doesn't mean that all of your marketing campaigns will be worth the investment.
This is where ROAS comes into the equation!
What is ROAS?
Return on advertising spend (ROAS) is a ratio representing how much revenue you gain from each dollar you spend on advertising. ROAS is a critical marketing metric that provides a clear understanding of return on investment and whether a campaign is worth the money you put into it.
Let's look at a simple example of calculating return on ad spend....
Say you spend $1,000 on an online advertising campaign in a single month. In this month, the campaign results in revenue of $5,000. Therefore, the ROAS is a ratio of 5 to 1 (or 500 percent) as $5,000 divided by $1,000 = $5.
How to determine your ROAS
The first step to being able to use ROAS to improve your ad campaigns is having a solid grip on your advertising costs, as well as good conversion tracking. After all, if you don't know what's performing for your company, you naturally won't be able to determine the returns you're generating.
Luckily for you, most ad platforms know that you'll want to track your campaign performance, so they've built in tools to help you do so. For example, as an e-commerce company, you can easily assign a conversion value to transactions and directly view the value of a particular campaign in AdWords.
This is also true for B2B companies as well. Using UTM parameters, you can set up tracking so that a specific action will be recorded in AdWords and a CRM like Salesforce. As those deals progress and eventually close, you'll be able to determine the return on your campaigns. It's important to note, however, that B2B companies often record their ROAS using a larger time window depending on their average deal cycle. This gives a more accurate account of ROAS.
ROAS vs. clicks
Now, you might be thinking, what's the big deal with ROAS? I use click tracking today and it gives me a good enough view into which advertising efforts are performing and what are not.
In reality, only tracking clicks or click-through rate can lead you down the wrong path. Say, for example, you're running a series of campaigns and seeing a good volume of clicks coming from one specific campaign. You might think on first glance that's the clear winner. However, you need to take a closer look.
Take this campaign as an example:
You can see that while Campaign 3 generated the most clicks and leads, the total revenue from the campaign and ROAS from that campaign is lower. In that case, you are paying for clicks that never convert! Understanding user behavior after the click and its impact on actual business metrics in critical in choosing the right campaigns to continue running for your business.
How to improve your ROAS
Now that you have a sense of what ROAS is and why it's important to track it, let's talk about a few optimization strategies you can employ to reach a good ROAS and improve profitability.
You need to simply get more revenue from ads without spending more on them. Sounds simple, right? Well, not exactly simple but let's dive into some tactics to help drive that number.
Be maniacal about performance
As mentioned above, not knowing what your actual returns are will prevent you from improving your ROAS. The first step in making gains is to know where you are starting from. You'll need to keep a very close eye on each and every ad tool that you're using to stay on top of performance. That means at least daily review of campaign performance -- more if your team has the bandwidth.
Traditionally, figuring out how your ad campaigns affect revenue would involve a tedious trip into spreadsheet land. The data you need to answer your advertising performance questions lives in your ad platforms, and up until recently, that data could only be extracted by pulling it out in a CSV format or building your own script to pull data from the Facebook Insights or Google AdWords API.
Tools like Segment Cloud Sources can help streamline that process, allowing you to take data from all of these ad tools and put them into a single SQL database where you can do deeper analysis that ad tools offer.
Get your targeting right
One of the biggest reasons that an ad campaign doesn't perform well is because you are targeting the wrong people with the wrong message. As with everything top of the funnel, you need to get the right message to the right user at the right time in order for it to resonate.
Using the data you're collecting on users (as detailed in previous chapters) is the best way to make sure you're getting your ads to people that will be most interested in them. Using a tool like Segment Personas, you can target users based on actions you've seen them take in the past on any channel. If you, for example, have seen a user view the pricing page or their shopping cart a number of times but not convert -- it's probably time to send them an ad. Similarly, if you see a one-time big spender go dormant for more than 30 days, it's also probably a good time to get some ads in front of them!
Keep your campaigns fresh
Another way to keep campaign performance up is to keep your campaigns fresh. This is a golden rule of digital advertising. The fresher your audiences and creative, the better your campaigns will perform.
For audiences, this means you'll need to keep your targeted lists (for known users) and lookalike seed audiences continually updated with the freshest information about who your users are. While doing this manually can be a big time suck on your team, automating will provide a huge benefit to your overall ROAS.
For creative, this will mean working very closely with your design team or agency to have a stable of creative that you can slot in as you start to see performance dip.
Use suppression lists
It goes hand-in-hand with the two tips above, but you'll also want to use suppression lists and make sure they stay current. Suppression lists are lists that you share with ad tools to exclude people from your campaigns. This typically is a list of your top customers -- or users that you don't need to spend money on to drive engagement. As users engage with you or make purchases, you may want to remove them from your ad campaigns to make sure you're not over-spending on customers that are already active.
Similarly, you might want to also setup suppression lists for customers that have recently had a bad customer experience. For example, if you know that someone is currently working with your support team on a bug or sales issue, it's probably best to remove them from ad campaigns for the time being.
Aggressively test different channels and formats
While you determine what works best for your company, it's worthwhile to test out a number of different things. Today's digital ad landscape is much different than it was even just a few years ago. There are a lot of unique ad formats available -- display, video, interactive, playable -- and a number of channels that you can test. Depending on your audience, each of these mediums could be a hit!
And, as mentioned above, new generally works well. Keep an eye out for new formats and channels, and aggressively test them to see if they can generate the returns your company is looking for. Dedicate a part of your budget for testing new channels and formats to make sure that, when new stuff comes out, you have some wiggle room to test it out.
Increase your site or app conversion rate
Perhaps the best way to increase your ROAS is to simply improve your app or site conversion rates. While this is somewhat removed from the digital marketing process, it has a lot to do with your overall ROAS calculation. If you can improve the number of people that convert once they hit your site or app, you'll boost your ROAS.
Using personalization tools is one way to make your page a little bit stickier for new users that find themselves there. Similarly, looking critically at your site or app's flow for new users to see where you can remove friction and reduce dropoff points will also pay huge dividends in making your digital ad strategy more worthwhile.
ROAS success stories: best practices, in practice
Learn how the Curology team used Personas to retarget high-value customers with relevant messages and build high-performing lookalike campaigns that generated returns.
Learn how the user acquisition team at Digital Ocean was able to build new audiences based on high-value customer attributes 5x faster than previous workflows, and was able to boost conversion rates by 33%.
ROAS benchmarks you should shoot for
An acceptable ROAS must be determined by every business individually. It has everything to do with your profit margins, operating expenses, and the overall health of your business.
While there is no set guideline, a common ROAS benchmark to shoot for is a 4:1 ratio — $4 revenue to $1 in ad spend. If you're a scrappy start-up that's a bit tighter on cash (we've all been there) you may want to shoot for higher margins. Alternately, if you are a larger more established business or a business that's looking to grow brand awareness, you can tolerate lower ROAS benchmark.