Measuring the success of your PPC ads is an important part of improving your paid search campaigns. However, not all metrics are created equal. If you want to get the most out of your ad spend, you need to focus on tracking the right metrics that help you understand how your ad dollars are being put to best use. That’s where return on ad spend, or ROAS, comes into play.
Return on ad spend is one of the most useful, yet underrated paid search metrics. It helps you connect what you are spending on a campaign to how much new revenue the ad generates. In the end, this powerful metric can help you determine which elements of your PPC ads deserve more of your budget and which ones you still need to work on.
Below, we’ll talk about what return on ad spend is, why it’s important, and how you can use it for your business. We’ll also provide you with some tips for improving your ROAS to get the most out of your PPC ad campaigns.
What is Return on Ad Spend (ROAS)?
Return on ad spend is a metric used to measure how many dollars in revenue you receive for each dollar that you spend on advertising. This metric helps you measure the effectiveness of your online advertising campaigns. With ROAS, you can determine which aspects of your PPC ads are working and find new ways to improve your future ads.
If you are thinking that ROAS sounds a lot like ROI (return on investment), you’re right. These two metrics are very similar in that they are both used to help you evaluate how well your campaign efforts are performing. However, though you may hear these terms used interchangeably by some digital marketers, it’s important to understand that they are in fact different metrics.
ROI focuses on the overall success of all your digital marketing efforts. This metric is tied to an overall strategy. When looking at your paid search ads, return on investment will measure the ad profit relative to their cost. ROI is a business-centric metric that helps you better understand how ads are contributing to your company’s bottom line.
In contrast, ROAS focuses on specific advertising campaigns, groups, or sometimes even keywords. This ad-centric metric measures the gross revenue that’s generated based on each dollar spent on ads. It specifically helps your business understand the effectiveness of your paid search ad campaign.
Return on ad spending is a very versatile metric because it can help you evaluate different aspects of your digital ads. You can look at a particular ad set to see which ones are performing best and are worth further ad spend. You can also decide which PPC ad targeting options are getting you the best results.
Why Understanding ROAS is Important
So what’s all the fuss about return on ad spend? Well, ROAS is the single best metric for helping your business better understand how each individual PPC ad campaign is performing. This measurement will also give you the information you need to prioritize campaign spending across all of your paid search campaigns.
For instance, let’s say your business is running 10 different PPC ad campaigns at the same time. You want to increase your ad spend, but you’re not sure which campaigns are giving you the best results on a per dollar basis. ROAS will give you that answer, allowing you to optimize your PPC budget by increasing ad spend on the ads that are performing the best.
Once you have the ROAS for each ad campaign, you’ll be able to see which campaigns give you more bang for your buck. If you find that one or two campaigns significantly outperform the others, you may want to consider reallocating some of your total PPC ad budget to the campaigns that are doing the best.Easily determine which campaigns & keywords are bringing you the most revenue.
The best thing about ROAS is that it doesn’t just work for ad campaigns. You can also use this metric to evaluate ad groups and target keywords as well. For example, if you find that your return on ad spend is much higher for certain keywords that you target, you may want to create new PPC advertising campaigns based on these high performing keywords.
Calculating Return on Ad Spend
Now that you know what return on ad spend is and why it is so important, let’s talk about how to calculate it for yourself. If you want to use this metric to improve your PPC ad campaign performance, you need to track your ad conversions and sales. Without this information, you won’t be able to calculate your return on ad spend.
With this formula, you can determine what your return on ad spend is.
While some marketing metrics may be difficult to calculate and track, fortunately, return on ad spend is pretty easy once you have the right numbers to plug in. All you need is the magical formula. Here is the formula for calculating return on ad spend:
(Revenue – Cost) / Cost
Before you put this formula to work, you need to first decide which component of your online ads you want to evaluate. Then, take the total revenue that this ad element has generated and subtract the amount that you’ve paid to run the ad. After that, you will then divide this number (which is your total campaign revenue) by your ad spend.
Most PPC campaign management platforms like Google AdWords make it easy to track your conversions and sales for each ad. Once you have the conversion and sale data in front of you, you’ll be able to plug this into the ROAS formula to better understand your return on ad spend. Alternatively, you can set up ROAS tracking in the Google AdWords platform itself or work with a digital advertising company like ours who can do it for you.
If you want to do it yourself first, you will need to make sure that you have set up conversion tracking in Google AdWords. If you are an ecommerce business, you will need to assign a conversion value to transactions. For non-ecommerce businesses, you can track conversions by setting up UTM parameters. Then, you’ll want to make sure that you add the conversion value/cost column to your AdWords dashboard.
To add the return on ad spend column to your Google AdWords dashboard, click on “Conversions” and “Conv. value / cost.”
Once you have added this column to your AdWords dashboard, you’ll be able to monitor ROAS.
And voila! You will then have your return on ad spend. But what do you do with this information? We’ll talk about that in the next few sections.
How to Determine If Your ROAS is Good
Now that you’ve calculated your return on ad spend, you’re probably wondering – what is a good ROAS? Ultimately, there is no one right answer for what a good ROAS looks like. A great return on ad spend will depend on your business and what it is that you sell. However, there are some general guidelines for determining if your business is achieving a successful ROAS.
In general you want at least a 3:1 ROAS. This means that your sales should be at least 3x your ad spend. This is the point at which you are not losing money. If you find that your ROAS is below this point, it’s time to rethink your ads and do some major adjustments to improve your return on ad spend. If your ROAS is higher than 3x, then you are actively making a profit and your ads are performing quite well.
Keep in mind that this is an average estimate and does not apply to every business there ever was. Also understand that you should run a campaign for a few months before you can truly see its performance. Running an ad for a week or so will not give you an accurate ROAS.
5 Ways to Improve Return on Ad Spend
The only way to really improve your return on ad spend is to reduce your ad spend by optimizing your ads or increase your revenue. Increasing revenue may require you to significantly increase prices or find different vendors that allow you to reduce production costs. That can be a bit tricky, which is why we recommend finding ways to reduce your overall ad spend.
We can’t possibly go into detail on all the things you can do to optimize your ads, but here a snapshot of what you can do. Below we’ll go into more detail of the ones we believe are the most important.
Here are a few ways that you can reduce your spending on PPC ads and improve your return on ad spend:
1. Keep the user journey in mind.
All elements of your paid search ads come back to one thing – your audience. If you don’t consider the consumer and where they are in the buyer’s journey, you won’t be able to maximize performance for your PPC ads. Though every PPC ad journey starts with a click, you also need to carefully plan out where the user goes from there.
For example, when developing your PPC ads, you want to make sure that you are providing an offer that is relevant to the target buyer. This is where your buyer personas come into play. There’s a good chance that you have more than one ideal buyer, so pay attention to how your ads will be perceived by each target audience.
In addition to providing a relevant offer based on the target buyer and where they are in the buyer’s journey, you’ll also want to consider your messaging. Your PPC ad messaging should be consistent across campaigns when it comes to brand voice and tone. However, how you capture the audience’s attention and how you convince them to take the next step to conversion will depend on who they are (their motivations and behaviors) and where they are in the buyers journey (awareness, consideration, or decision).
2. Be sure that you have ads created for a mobile audience.
When considering ROAS for your Google Ads, keep your mobile audience in mind. Google research has shown that there are more searches on smartphones and other mobile devices than desktops alone. In addition, 50% of consumers who make a local search for a product or service will make a purchase within a day of the search. Since a lot of local searches take place on mobile devices, it’s vital that you keep these users in mind when developing your PPC ads.
Create ads that are developed specifically for display on mobile devices. Conduct A/B tests to find out which copy is the most effective for this audience. You can also test what it is that you plan to offer. Once you find out what works best for mobile users, use this information to improve your ad performance and ROAS throughout all of your campaigns.
3. Keep an eye on competitors.
As with any marketing strategy or tactic, it helps to keep an eye on your competitors. Are their PPC ads successful? What are they doing well? By looking at their successes and mistakes, you’ll be able to find ways to improve your own PPC ad campaigns. Though there’s no way to know for sure how these ads perform without asking them, you can see what type of ad content they are serving to search engine users and think about ways to emulate them.
4. Adjust your bids based on devices.
Another way to decrease ad spend and thus increase ROAS is to set different bids for your ad campaigns based on the type of device – mobile, tablet, and desktop. Desktop ads are typically the default ad, so based on your performance on desktop, you can adjust the ads on other types of devices accordingly.
If you find that more users on a certain devices are purchasing more frequently, you’ll want to set the bid higher for that device. For example, trends show that consumers are often more likely to browse on their mobile device but buy on their desktop. If you find that this is true for you and more of your conversions are coming from desktop, you’ll want to adjust your mobile bids down so that you are spending less on mobile and funneling more of your PPC ad budget to the ads that are converting best.
5. Adjust bids based on time and location.
In addition to adjusting bids based on device, you can also adjust bids according to time and location. This will allow you to spend less during times and in locations that are less likely to perform. For example, if you find that your ads don’t convert well during the weekends, then that means that these clicks are less valuable. To reduce ad spend, and thus improve ROAS, adjust your bids for ads that are displayed on Saturday and Sunday.
When it comes to the time of the day, you will typically see that there are far less clicks and conversions from midnight to 7 a.m. People just aren’t as likely to buy during these hours. To optimize your ad budget, reduce your bids during this time. That way, you aren’t spending money during the times that your ads are least likely to perform well.
You should also adjust bids based on location. Look at your ad data to find out which areas your ads are performing best. Depending on what your business sells, you might find that your ads perform better in bigger cities or areas that have a certain climate. Based on the insights that you gain from your PPC ad data, you can then determine which locations your ads perform well in. Reduce bids in areas where your ads don’t tend to drive conversions.
When you type your target keywords into Google, take a look at what PPC ads pop up. Look at both the copy and the offers to see what your competitors are doing differently from you. Is there anything you see that you might want to try with your own ads? If you want to improve ROAS, you’re going to have to try some new tactics to see how you can get the most out of your ad spend.
Return on ad spend is one of the most important and useful metrics that you can use to understand how well your online ads are driving new revenue. Calculating ROAS is a fairly simple process as long as you are accurately tracking conversions and sales for your paid search ads. However, it’s important to remember that how you use your ROAS data can have a significant effect on the future success of your ad campaigns as well as impact your company’s bottom line.
Keep the tips above in mind for getting the most out of the insights you gain from measuring ROAS. The only way to ensure that your PPC ad campaigns are optimized and helping you get the most out of your ad spend is to take what you learn and apply it to your ads to improve performance.
And that is exactly what we do every single day to help our clients grow their business. So reach out to us if you’re interested in growing yours too. Do you have more questions about ROAS? Or do you have more tips to share on how to improve your return on ad spend? Share it all with us in the comments. We’d love to discuss them!