There's no denying it: Advertising is big business. By 2021, experts estimate that marketers will spend close to $119 billion on everything from display advertising to email marketing, according to Forrester. Digital marketing is particularly important for marketers looking to craft effective campaigns. In 2018, the average company expects to allocate more than 40 percent of their budgets to digital, and that figure is expected to continue rising as technology evolves.
No matter the medium, one thing remains true across the board for businesses of all sizes and marketing budgets: plans change. And when they do, you're likely to face a major decision about your ongoing budget. It would be easy to assume that if a campaign is getting results, you should increase that budget — but that's not always the case.
To make an informed decision about increasing your budget, it helps to understand your return on ad spend (ROAS). To help set you on the right path, we gathered up the basics, including what ROAS is, how to calculate it, and why it matters.
What Is ROAS?
By definition, ROAS is a metric that measures how effective a paid campaign performs. Sounds simple enough, but this key figure is crucial in comparing campaigns to determine the ones that are most profitable. ROAS can also reveal aspects of a campaign that are generating more revenue than others, and it helps managers determine where to bump up their advertising budgets or scale back to maximize returns. In short, ROAS is the calculation needed to figure out what's working and how to improve in the future.
How ROAS Is Calculated
The basic formula is pretty simple: Revenue divided by cost equals ROAS. To see it in action, let's look at an example:
Marketers spent $2,000 on a campaign held in April, with $1,000 devoted to paid search and another $1,000 spent on display ads. In May, the team evaluated both components of the campaign and discovered that the paid search component created $10,000 in revenue, while the display portion generated $5,000. Using the formula above:
Paid Search: $10,000 divided by $1,000 gives you an ROAS of 10:1, or $10 revenue for every dollar spent.
Display: $5,000 divided by $1,000 gives you an ROAS of 5:1, or $5 revenue for every dollar spent.
If the team needs to choose where to increase spending, they now have a clearer picture of the components that are performing better.
Beyond the Basics
That same formula can be applied to different elements of a campaign, including ad groups and keywords. To calculate the ROAS for these elements, marketers need to track details such as the clicks that led to specific purchases, tracking conversions, and determining the amount of money that a campaign, individual ad, ad group, or keyword generates.
Other important metrics include the click-through conversion rate, calculated based on the number of conversions divided by the number of your link’s first-time clicks. This gives you good insight into how often views are converting for a specific ad. View-through conversions are a little trickier because they tell you more about viewers who see the ad, but don’t click on it immediately. Later, they find your website on their own and convert based on the impression the ad initially gave them.
Conversion tracking is easy if you're using online platforms like Facebook or Google Ads. Tracking sales is simple when you have good customer relationship management (CRM) software, which lets you tie all of your important marketing details to a new lead. When that lead turns into a customer or client, you can easily see the marketing efforts behind the sale.
Knowing where and when to adjust and allocate your budget to specific marketing efforts can make all the difference in your long-term success. ROAS is a great tool to help guide your decision-making process. When you use this metric instead of just going off results or revenue, you gain incredible insight into the campaigns (or aspects of campaigns) that are most effective and worthy of an increased budget.