How ROAS “Zooms In” on Your Marketing Strategy
Are your campaigns actually making money for your business?
Marketers today have more data points and statistics at their fingertips than ever. But all of this information comes with a cost — analysis paralysis.
Luckily, there are a few important metrics that keep things in focus, so you can see the direct impact of your digital marketing efforts. One metric has the ability to pull every one of your marketing efforts into focus: return on advertising spend (ROAS).
While it’s not a new metric, ROAS has proven to be useful for people in all corners of marketing.
What Exactly Is ROAS?
Return on advertising spend (ROAS) is the amount of revenue a specific marketing effort generates compared to the amount invested in that effort.
For example, if you spent $100 on a campaign, and it generates $200 in revenue, your ROAS is $2 for every $1 spent.
$200 / $100 = $2 ROAS
ROAS can also be expressed a multiple (2x), ratio (2:1), or percentage (200%).
With this straightforward measurement, marketers and managers can see the impact of the specific budget of that campaign and then determine which adjustments (if any) need to be made to the strategy.
What About ROI? Isn’t It the Same Thing?
Everyone has heard about return on investment (ROI) at some point. We throw it around casually to express the “profits” of running a business, campaign, vendors, or even employees. Gary Vaynerchuk actually coined “the ROI of your mother.”
While ROAS and ROI are related, they don’t serve the same purpose. The textbook formula for ROI is actually quite different:
ROAS: Revenue from Ad / Ad Spend
ROI: (Revenue – Cost of Ad) / Cost of Ad
Let’s apply the ROI formula with our example from above:
($200 – $100) / $100 = $1 ROI
So, the ROI of the same example is actually 100%.
What’s More Important: ROI or ROAS?
So what’s the real difference between ROI and ROAS? Which one is more important?
As Sales & Orders suggests, ROI provides a high-level view of the overall profits from your marketing budget, while return on ad spend “zooms in” to the effect of a specific ad or campaign. That makes ROAS more useful for improving your marketing strategy.
The key takeaway here is that ROI refers to your company’s overall profits, and ROAS refers to your campaign-specific revenue. This is an important distinction for businesses — like auto dealers — that sell multiple “segments” of products for which they run specific campaigns.
Tim Mayer of Trueffect notes that ROI is related to a strategy, whereas ROAS is related to a tactic. For example, the ROI of a campaign includes overhead costs such as shipping, labor, taxes, and more. The ROAS of a campaign is much simpler for marketers to calculate and use to hone their craft on efforts like Facebook, Google, email, and other digital services.
We recently hosted a webinar with LeadsRx, a leading attribution software provider, on how to maximize your ROAS using multi-touch attribution. Watch it on demand now!
Important Pieces of the ROAS Puzzle
Like all marketing metrics, ROAS depends on sound data.
In all of your marketing channels, it’s important to accurately calculate the value of each conversion or sale so you can consistently track ROAS over time.
In Facebook ROAS, for example, advertisers have the ability to track the monetary value for each specific conversion or transaction (whether it happens online or offline).
In addition to sound data, businesses with multiple campaigns also need to consider the attribution model.
In “last touch” attributions, only the most recent marketing activity will get credit for ROAS. Retargeting ads, for example, tend to get all of the attention for ROAS since they were the last interaction before a conversion or sale.
These last-touch attributions often skew ROAS and don’t acknowledge the other ads or emails a person may have seen beforehand.
Below is what a typical ROAS looks like for retargeting ads on Facebook:
Note that these values are relatively high not only because of last-touch attribution but also because they’re for an auto dealership, where just one vehicle sale can push ROAS well above $1.
Multi-touch digital marketing strategies require careful performance measurements. As Marketing Land points out:
Regardless of which attribution model you choose, it’s critical to start viewing performance marketing data in ways that more accurately reflect how your audience shops today. That means valuing the many channels and devices shoppers interact with and gaining a better grasp with how different marketing initiatives perform at different stages of the funnel.
The timing of your attributions can also play a big part in how your ROAS is calculated. If your Facebook ads have only a one-day conversion attribution, for example, any conversions on day two would not impact ROAS.
What Should My ROAS Be?
We’ve set some clear benchmarks for the automotive industry, but ROAS is subject to many factors, including:
- Your industry
- Your competition
- Your overhead costs
- The specific attributes of your product
In 2016, Nielsen Catalina Solutions calculated the average ROAS across all industries at 287% (meaning $2.87 of revenue for every $1 spent), with a range from $2.59 for over-the-counter products up to $3.71 for baby products.
What Are the Weaknesses of Using ROAS?
Focusing on return on ad spend is a great idea for marketers in any industry. It’s an important needle to move. However, ROAS is often mistaken for ROI on advertising, clouding the scope of the measurement.
It’s important to note that ROAS is not a business management metric — it’s a marketing metric. While you might see ROAS up in the 400 – 500% range for a certain campaign, it’s easy to lose sight of your other business activities with product development, production, and customer service.
Despite the specific focus of ROAS, it still has profound value for marketers who calculate and use it to inform their strategies.
Whichever transactional data you use to calculate return on ad spend, make sure to use it consistently. We recommend recording your work so you can properly evaluate and compare future campaigns. Watch our marketing attribution webinar to learn more!
More Metrics for Marketers
While ROAS is certainly important for anyone working in digital marketing, it’s just a piece of the overall puzzle of metrics and benchmarks.
To help automotive marketers cut through the fog of numbers, 9 Clouds recently created the 2020 Performance Benchmarks Report.
This 18-page PDF takes an in-depth look at the important measurements for email marketing, Facebook advertising, Google advertising, and more.
Although the report is specific to the automotive market, the principles and methods can apply to virtually any business. No matter what field of work you’re in, we encourage you to take a look at this new (free) resource.