Return on Advertising Spend (ROAS)
January 07, 2020
What is Return on Advertising Spend (ROAS)?
Return on Advertising Spend (ROAS) is an essential metric for advertisers. In the highly competitive world today, businesses implement every strategy backed by robust data.
Marketers are continually improving the metric to evaluate the amount spent in the advertisement space and see if it's going in the right direction. There are various tools such as quality score, click-through rate, cost per conversion to evaluate the marketing spent.
What is the significance of ROAS?
While keeping the focus at the core metrics, marketers also need to look at the larger picture. The ROAS metric, thereby, offers key answers to the fundamental marketing question. That is if the marketing spend is X amount, what is it that the company is getting out of it. ROAS provides that larger picture to the marketers. It gives them insight into the lead conversions and also how much of the revenue the conversion actions are generating.
Advertisement is an investment, into your product or services and eventually the brands. It is an important step in creating brand loyalty and brand awareness.
If your advertisement and marketing strategy as a business is not profitable, and it's not giving the desired results, it is not worth the investment. Hence the ROAS metric helps marketers understand the correct results of their marketing channels and if it's worth it.
Marketers set the ROAS goals for the business to evaluate the strategy and the spend. By calculating return on ad spends, businesses can measure the returns on every penny they spent on advertising.
Why is ROAS a critical tool?
- Return on ad spend (ROAS) is similar to the return on investment (ROI). The overall effectiveness of the marketing implementation is evaluated through ROI. On the other hand, ROAS is relied upon to evaluate the effectiveness of the specific marketing campaign or advertisement.
- ROAS provides a result on the ad set if it's worth time and money. It also gives clarity on whether the target audience is getting impacted or not.
- ROAS is used to evaluate traditional marketing as well as digital marketing.
- Public relations spend can also be assessed through ROAS metrics.
How to calculate the effectiveness of ROAS?
The formula to calculate ROAS is straightforward. Divide the revenue by the cost of advertising, and you will get the result if your investment was worth the spent.
- Businesses do acknowledge that it is incredibly important to know the end results and performance report of advertisement, be it traditional or digital. ROAS allows them to recognise whether their marketing strategies are working for them or not.
- If the ROAS is profitable as predicted, then the campaign has higher chances of being successful.
- ROAS works primarily in regard to the launch of a new product or services.
- While bringing in fresh efforts, companies need to determine if the particular ad campaign they are running is giving them the anticipated results. If not, marketers then pull back the campaign or make the changes in it as required.
- No matter how effective the ad campaign looks like while launching, if it's not going to work, then it is of no use, and the company will face significant losses.
- ROAS works best for digital marketing, as there are precise tools available to track back the response.
- Digital marketing evaluation is done by tracking leads and conversions. There are tools like Google Analytics which are used to determine the ad campaign results.
- For ATL marketing such as TV commercials and radio ads, the reach and the frequency are calculated to determine the success.
- Return on ad spend evaluation can be very specific and also broad. The metrics can be used in various ways to get the results. If the company has a marketing agency on board, then the agency will calculate the ROAS for the campaign and provide data to the company.
- Tools such as Google AdWords and Google Analytics or other such services help the companies understand if they are meeting the set achievable numbers and goals or not.
- For instance, a specific web banner advertisement is not giving the desired leads or the leads are generated but they are not useful as they are not the target audience to the company. In such cases, marketers can quickly change the course of action.
- ROAS also provides data on conversion rates, the higher the conversion rate, the higher ROAS is.
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Is ROAS data always accurate?
- The study shows that ROAS has its own limitations. Every evaluation metric will give you the results based on the data it has in its custody. But there will be a lot of more external factors affecting the ad campaign results.
- ROAS results may also differ when the products have a higher cost of production and shipment compared to the ad budget. So even if the ROAS is higher, the company still loses money. Because the combined expenses are higher than the overall costs of the advertising. Though in such instances, the marketing campaign can even be called successful. As the marketers have received the desired results through the ad campaign.
- Notably, the cost of advertising is the only factor considered while calculating the ROAS, and not the production cost.
- It is incredibly difficult to calculate ROAS for traditional marketing, as there is no exact mechanism available. Unless the marketers put a call to action and have a call centre to track response, it is difficult to follow how many people saw the billboard on the highway and bought the product.
- Apart from the standard ROAS metric, marketers often review their set benchmarks to evaluate the success of the ad campaign. When you know what parameters worked best for the product or services you launched, then the marketers can use a similar margin to determine the necessary ROAS.
- Conversion actions and campaigns can be identified and measured after setting a benchmark from the previous goals.