Definition of ROAS and why it is important to your performance marketing strategy
If you’d like to have a look at more specified financial data when running your campaigns on Google Ads or in FB ads, ROI isn’t a metric, which will meet your goals to the full. Why? Because ROI will only give you a general or overall picture of your ad performance without diving deeper into ad spends.
ROAS or Return On Ad Spends is that numerical method, which brings in handy information on how efficiently your marketing budget was allocated.
It determines the profitability of your digital marketing channels by measuring the return on advertising investments. A broader description of this metric can be found in Google Help Center.
|Important note: though some marketing-related resources and websites define ROAS as a metrics specifically dedicated to eCommerce, this definition is partly correct as return on ad spend can be scaled to non-eCommerce sales, like buying subscriptions or services. Additionally, it’s applicable for both B2C and B2B marketing channels.|
ROAS goes hand-in-hand with such metrics as Sales Rate (SR) and Cost Per Sale (CPS) along with Conversion Rate (CR) as well as Cost Per Lead (CPL).
But do not be confused by ROI vs. ROAS comparison – these metrics are both equal and form an integral part in what is the set of rules that determines how sales and conversions perform on a particular site.
You, as a marketing professional or a business owner, who takes the full control of your business’s marketing strategy, only need to make a more in-depth analysis of ROAS. To conduct such an analysis you need to:
- calculate ROAS, based on this formula:
|ROAS = Revenue From Advertising (From Ad Source)/Cost Of Advertising (Cost of Ad Source)|
Here is a video tutorial with tips on how to calculate ROAS:
Target ad spends calculations in Excel, based on cohort analysis, can be found here:
- understand what is a good or bad ROAS:
Nielsen report from 2016 provides us with still actual and relevant data on this – 371% or $3.71. In other words, for every $1 spend on advertising a particular business entity can make a profit of $3.71.
- if your business deals with selling and delivery of physical goods, add these metrics and spends to your calculations:
Cost Of Goods Sold (COGS)
Another thing is when you are not eCommerce company and relies on affiliates or vendors, which provides your online business with assistance on the campaigns. One needs to make careful calculations of the impact affiliate and/or vendor services are making on ROAS. The expenses, which are spent on this will either adjust this metric or cause it to decline it as a useful source of business information.
Commissions from affiliates or vendors is an additional factor, which needs to be added to cost analysis.
Back to our ‘funnel’ in Google Adwords, you, for example, have a raw data, where the results, based on your ROI, shows you one best-performing campaign among 10 ones. So, here are several steps to find if, in fact, this campaign outperforms others:
- Start to analyze campaigns by the best CTR (Click-Through Rate) and CPC (Cost Per Click). It is done to get the overall performance at first glance. It also depends on keywords grouping (from exact to broad match) whether to proceed with the next step or not. General word or word combinations = less accurate allocation analysis. Ad viewability should also be taken into consideration.
- Having defined the best one, try to broaden data filters by looking at CR and CPL, comparing them to the metrics in the first paragraph and the upper measurement margin, which you have presetted during your previous campaigns.
- Finally, add SR and CPS to understand how profitable is a particular campaign. These metrics deal specifically with the purchases so that it can give the most objective view on campaign performance.
Do not forget about the cycle of ROI/ROAS – 100% return on investment/ad spend is 1x, 200% – 2x and so on. But do not be confused with it as, for example, getting $45000 in revenue by spending $5000, gives you 9x, but, take a look at the above-mentioned additional metrics and be sure to include them to the final check. Based on this, we highly recommend making measurements based on 5x cycle to take the right decision on your financial strategy within PPC.
|Important note: as for the latter, Facebook Ads Manager’s can be simply added when a purchase is defined as a conversion. If the main purpose of the FB ad campaign is lead generation, the process of setting tracking up is a bit complicated and, that’s why it’s harder to measure ROAS. In this case, you need to do some manual match between Facebook data and your CRM system to identify the new leads and connect that list with your FB ads through the lead custom reporting column. More information on this can be found here and here. Please, also take into account, that FB gives you data on immediate purchase value excluding LTV, relevance, frequency and so on – check Facebook attribution tool to get insights on how to cope with this issue.|
It’s worth noting, that quality of ad copy, the relevance of landing page to the actual advertisement and its mobile-friendliness also should be considered in terms of ROAS optimization. These elements comprise an integral part in customer’s path to purchases on your website and any issues with one of them can have a generally negative impact on marketing campaign’s performance and target return on ad spends.
Attribution model, how it is connected with ROAS and data-driven decisions
Previously, we gave you a tiny hint on the attribution by providing you with a link to such a tool on socials. But what it actually means and how it actually works?
Simply, it’s something, that comes from google analytics, where attribution most commonly refers to identifying the right approach to the steps within a customer journey, which contribute to achieving conversion goals. In other words, attribution models are used to understand the user’s path to making conversions.
In, marketing analytics, there are such types of attributions:
- Last interaction – simply, when the last user’s touchpoint counts as a final step to conversion;
- Last non-direct click – users come from non-direct traffic;
- Last Google Ads click – when user or users click on paid search ad before making a purchase;
- First interaction – any first touchpoint, that leads to conversion;
- Linear – conversion value is distributed across several channels, like paid social and paid search channels, direct and e-mail channels;
- Time decay – those channels, which are constantly used within a particular period of time, when a conversion was made;
- Position based – 40% of attribution goers to the first touchpoint, 40% the last and 20% – to touchpoint/touchpoints between first and last interactions.
It’s really hard to define which model is better and it depends on the type of business, conversion goals, and type of products/services. But, fortunately, multi-touch or mixed model is the most commonly used model, that give, comparatively significant data on user behavior. This model comprises Time decay, Linear and Position based attributions.
In this instance, a complete list of marketing attribution models can give a 360 view on how to use and leverage on them for digital performance marketers.
Attribution plays a key role in analyzing ROAS, providing marketers with two-fold information:
- how well is an interaction between user and ad;
- which channels were the most fruitful ones in terms of revenue.
Even a small issue with an element of ad copy could cause much damage to the campaign. For example, improper settings of call extensions can increase your bounce rate dramatically, especially in case if your business depends heavily on phone orders. On the other hand, it goes without saying, that channel strategy has a direct impact on the effectiveness of advertising no matter what business you are running.
And that’s where data-driven decisions come into play.
To illustrate this we bring in an example of how a specific business can leverage on this by using appropriate marketing software (it’s not a secret, that Google Analytics isn’t an ideal tool, so to use a third-party software, which can be more helpful in solving special marketing issues, is a good idea).
Real business case
To put it easier, let’s look at an example of how it’s done, based on the case of a real business with practical goals. Cognita, one of the largest private school companies, was confronted with a similar issue and was had to find a solution on how to cope with this issue.
School’s marketing specialists were in need to understand two key elements to create valuable digital marketing strategy:
- Creation of customer journey map and journey analysis.
- Marketing channel analysis, based on user interactions.
Educational companies and schools experience a big issue, when it comes to lead generation and marketing budget planning. It’s one of those sectors, where data-driven decisions are decisive in defining buyers, due to these widespread issues.
Selecting the right school is a long process, so the potential losses in ad spends might be imminent, if not to tackle this situation with the right approach to ROAS measurement.
Here is so more information on how Cognita solves the issue of ROAS measurement and getting the, using Windsor.ai software solution. Windsor was chosen because it allows automating data integration (especially, data, related to costs) precisely and more efficiently and less time-consuming, compared to Google Analytics.