In digital advertising, one of the most important metrics to track is return on ad spend (ROAS). ROAS is a simple but powerful way to gauge the effectiveness of your digital advertising efforts.
What Is ROAS?
Simply put: ROAS is a measure of how much revenue your advertising campaigns generate compared to how much you spent on those ads:
- High ROAS means you’re getting a good return on your investment.
- Low ROAS indicates you may need to make some changes to your ad strategy.
But how do you determine your ROAS?
How to Calculate ROAS
ROAS calculation is pretty easy: You divide the total amount of revenue generated by a campaign by the cost of those campaigns.
The resulting number is your ROAS:
ROAS = (Total Revenue ÷ Total Ad Spend) x 100
In practice, this might look like:
ROAS = ($5000 ÷ $1000) x 100 = 500%
What is a Good ROAS for Ecommerce?
Industry-wide, an ROAS of around 2.87:1, (287% or $2.87 in revenue for each ad dollar spent) is considered good.
A “good” ROAS for an ecommerce business, on the other hand, can vary greatly depending on a number of factors, including the nature of your products, your industry, your target market, your overall business goals, and how much attention and weight you gave each factor.
Your products and the industry or category they’re in are especially important.
- Do you sell a product that’s brand new or in a very niche category? Do consumers need to acclimate to your offering and discover how that product fits their needs? Ads can help build awareness, but ROAS may take time to gather steam.
- Is your product in the high-end or luxury category, and have you done your due diligence in market research? If your item fulfills an immediate need within your market, ROAS could land pretty high. But, as you can see from these two examples, ROAS is nuanced and there’s several spots where you can miscalculate, under, or overestimate your potential —from not researching your target market well enough to over or under-investing in advertising can impact your return on ad spend.
That said, according to Nielsen, a common benchmark for ecommerce ROAS is 4:1 (400% or $4 in revenue for each ad dollar spent). This figure is fantastic compared to overall ROAS, but the ad platform you choose also plays a significant role.
ROAS Differences by Ad Platform for Ecommerce:
According to a press release by Fospha in reference to its State of eCommerce Report Q4 2022, the best advertising platforms for ecommerce ROAS in 2022 were TikTok and Pinterest, with Pinterest taking the top spot specifically for ecommerce furniture brands. Fospha’s metric — what they’ve dubbed Relative ROAS — accounts for the nuances mentioned above within a dataset of ecommerce businesses of all sizes. The most interesting news the company uncovered was that, for ecommerce startups aggressively chasing ecommerce advertising, Tiktok outperforms all other channels in the mix, whereas for well-established ecommerce brands, Snapchat is a drastic underperformer. In each measurement provided, however, YouTube and Google Shopping consistently ranked at the bottom as the worst ad platforms for ecommerce ROAS.
ROAS Differences by Industry in Ecommerce
ROAS can vary significantly by industry within the ecommerce sector. For example, businesses selling luxury or high-end products may have a higher ROAS than those selling lower-priced items because the products or services being advertised in these industries are generally more expensive and generate higher margins.
What Is a Good ROAS for Lead Generation Sites?
The “good” ROAS for lead generation sites will depend on the specific industry and business model. However, a common benchmark is around 100%. This means that for every dollar you spend on ads, you’re generating one dollar in revenue.
ROAS in lead generation, just like ecommerce, can also vary significantly and for the same reasons ROAS varies in ecommerce.
The Difference Between ROAS and ROI
ROAS and return on investment (ROI) are often used interchangeably, but they are actually two different metrics. ROI is a measure of the profitability of an investment, while ROAS is a measure of the effectiveness of an advertising campaign.
ROI is calculated by dividing the net profit of an investment by the initial cost of the investment. It’s a broad measure that takes into account all the costs and revenues associated with an investment, including things like employee salaries, rent, and utilities.
ROAS specifically focuses on your ad campaign’s effectiveness. It’s a narrower measure than ROI, but it can be a useful tool for evaluating the effectiveness of specific ad campaigns.
When to Use ROAS vs ROI
So, when should you use ROAS and when should you use ROI? If you’re trying to evaluate the profitability of a specific investment, like a new product line or a marketing campaign, ROI is the better metric to use. It takes into account all the costs and revenues associated with the investment, so it gives you a comprehensive picture of how well the investment is performing.
On the other hand, if you’re trying to evaluate the effectiveness of specific ad campaigns, ROAS is the better metric to use. It only accounts for the costs and revenues associated with the ad campaign, so it gives you a clear picture of how well the ads are performing.
The Difference Between ROAS and CPA
Another important metric in digital advertising is cost per action (CPA), which is the amount you pay for each action, such as a sale or a lead, that’s generated by your ad campaigns. CPA is often used in conjunction with ROAS to get a more complete picture of the effectiveness of an ad campaign.
While ROAS measures the overall revenue generated by an ad campaign, CPA measures the cost of generating that revenue. By comparing the two, you can get a sense of how efficiently your ad campaigns are converting clicks into actions.
How to Improve ROAS Right Now
There are a number of steps you can take to improve your ROAS:
- Define your goals: Clearly define what you want to achieve with your ad campaigns, whether it’s generating leads, driving sales, or increasing brand awareness. Having a clear list of goals helps you measure the success of your campaigns and identify areas for improvement.
- Target the right audience: Make sure you’re targeting the right people with your ads. Use tools like demographics, interests, and behaviors to reach the audience that’s most likely to take the desired action.
- Use relevant ad copy and visuals: Relevant, compelling ad copy and visuals specific to your target audience and the products or services you’re promoting is crucial. Creating campaigns with your audience in mind helps increase the chances of clicks and conversions.
- Test and optimize: Run A/B tests to see which ad copy and visuals perform the best, and use this data to continuously optimize your ads. A/B tests and continuous optimization help you get the most out of your ad budget.
- Monitor and adjust: Regularly monitor the performance of your ad campaigns and make adjustments as needed to help you stay on track. These adjustments ensure you’re getting the best possible ROAS for your campaigns.
Partner with the Experts at Symphonic Digital To Boost Your ROAS Today
If you’re looking to boost your ROAS and get the most out of your digital advertising efforts, consider partnering with the experts at Symphonic Digital. We specialize in ecommerce advertising and have the knowledge and experience to help you achieve your business goals. Contact us today to learn more about how we can help you improve your ROAS and drive more revenue for your business.