ROAS and Ad Spend: How to Make Sure Your Online Advertising is Efficient

As the digital world grows at a phenomenal rate, your presence and digital advertising must be more accurate and profitable. It’s crucial that the money that you’re spending to get your product seen by the right people is being used wisely and precisely. After all, no marketer wants to watch their advertising spend go down the drain, right?

There are so many metrics we monitor and optimize in our PPC campaigns. There’s return on investment (ROI), return on advertising spend (ROAS), ad spend, click-through rate (CTR), cost per click (CPC), cost per lead (CPL), cost per opportunity (CPO) and so many more. It can get a bit overwhelming, even for experts who have been doing this for many years, but all these boil down to two main areas of focus – ad spend and your return on ad spend.

Let’s dive into the ad spend and ROAS world, so you can make sure that you’re putting your money where your ultimate customers are to ensure an impressive conversion rate.

What are ad spend and ROAS?

The concept of online advertising in digital marketing is pretty simple. You set up your ad and ad groups, target market, and platforms and create compelling copy that includes a CTA and sometimes an engaging visual. But, how do you know if your marketing strategy is working? This is where ad spend and ROAS come into play.

What is ROAS? ROAS gives you the opportunity to understand how efficient your marketing campaign is. You can use the ROAS formula on different campaigns in order to gauge which is the most successful and where to raise or lower your ad spend. The end goal is that you have a high ROAS. This ensures maximum efficiency and correct advertising techniques that make the most of your advertising efforts and total revenue while lowering your advertising costs.

Before we take a look at ROAS calculations and the inner workings of how this marketing metric can help your business, it’s important to understand a few other essential paid metrics to see how target ROAS fits into a campaign’s profitability.

Paid search metrics and why they matter

The best way to get an accurate picture of the quality of your digital marketing strategy and paid campaigns is by analyzing as many paid search metrics and gathering as many insights from the data you have available as possible. While paid search ads, such as pay-per-click (PPC), may seem risk-free, as you only pay if someone clicks, it isn’t because any time you spend part of your budget you need to know you aren’t spending it in vain. Ensuring your spend is worth it raises a few questions such as

• Who is clicking on my Google ads?
• How are my ads performing compared to industry benchmarks?
• Are the people clicking on my ads quality leads?
• Is spending money on these ads a wise investment for my budget?

In an effort to answer these questions and understand the value of an ad, there are many marketing metrics to analyze. So, buckle up, it’s time to dive into some paid search metrics.

CTR

CTR, or click-through rate, measures the percentage of people who see your ad vs. how many actually click on it.

For example, if your ad is seen by 1000 people and 25 clicks on it, your CTR is 2.5%. CTR is an important metric to see if people are clicking on and engaging with your ads. However, CTR is not a stand alone metric, conversions prove to be more important than the actual click-through numbers.

CPC

CPC, or cost per click, is where the money starts to come into play. CPC tells you exactly how much you are paying per click.

For example, if you’ve budgeted $1000 on a campaign, and have 1000 clicks, your CPC is $1.00. Different industries have different standards regarding desired CPC rates, and product price is also a significant factor.

CPL

CPL, or cost per lead, dives deeper than the standard CPC metric. Calculating cost per lead requires specific tracking information in order to trace each lead to its source and know where your lead generation is strongest. In order to calculate CPL, just divide your total spend on a certain campaign by the number of leads it generated.

CPL is a valuable metric to show you that not only are people clicking on your ad, but also becoming solid leads. You don’t want random clicks that lead nowhere, so tracking and measuring this is a must.

CPO

CPO, or cost per opportunity or cost per order, gets even more specific than CPC and CPL. With CPO, you’re conversion tracking. This is the most specific step on your funnel and your overall goal.

CPO is calculated by taking your total ad spend on a campaign and dividing it by the number of opportunities. This will give you a solid indication of if your campaign is worthwhile for your specific product.

How does ROAS work and how is it calculated?

Let’s get back to ROAS (and ROI). ROI and ROAS take into account the amount of revenue generated from a particular ad campaign (as opposed to the earlier metrics which only take ad spend into account). ROAS is calculated by dividing your total conversion value by your advertising cost.

Example: You have a campaign that generated $3000 in sales. The campaign itself cost $1000. Your ROAS in this case is 3x or 300%.

In another situation, you have a campaign that generated $10,000 in sales. You’re stoked about the success but when you take a look at your ad spend, you realize that you’re in trouble. In this case, you spent $8000 on the campaign. Your ROAS is 1.25x or 125%. While you earned more in this campaign, your ROAS and profit margin are much lower.

Pain points and limitations with ROAS

ROAS is an important metric, there’s no doubt about that. But, it has its limitations.

ROAS cannot be used in a bubble. ROAS doesn’t judge magnitude and growth. For some companies, it may be better to have a slightly lower ROAS while growing a new product or selling a product that the company knows is highly profitable.

Return on ad spend looks at revenue and not at profit. This is another downfall of the ROAS metric. On products that are low profit and high revenue, looking at ROAS may give false information.

It’s also important to keep in mind that ROAS is a short-term metric and doesn’t take into consideration the lifetime value of new customers. To fully understand the impact of online advertising campaigns you should calculate the lifetime value (LTV) separately with the formal below.

When looking at ROAS figures it is also important to take various mediums into consideration. Sometimes, comparing campaigns across different mediums using ROAS doesn’t make sense, as each medium has different benchmarks and expectations.

Why is ROAS an important metric for ad spend?

To ensure that your advertising metrics are on point and efficient ROAS is an essential and handy metric. By tracking it over time, you’ll be able to make informed decisions about which campaigns are worth investing in to bring in the most revenue and have the potential to drive profit.

What if you don’t have accurate ad spend data? Well, then you won’t be able to assess your ROAS and you’ll be lacking an important part of your marketing evaluation to tell if your campaign is effective. Not only that but if you’re lacking information on trends and stats in your field, you won’t be able to benchmark yourself against your competition. That’s where Similarweb’s Digital Marketing Intelligence solution comes in.

Get ready, Similarweb’s upcoming release can help you:

1. Better understand your ad spend. Lock in on what ad spend is and why it’s important in ways that you didn’t think were possible.
2. Plan and justify ad spend on Google based on competitive data. Our ad spend estimation feature gives you a behind-the-scenes look at competitors’ data, with the ability to benchmark the ad spend of any website in any industry. Then you can understand if you are over or under-budgeting in your industry.
3. Understand the effectiveness of your competitors’ campaigns. See what your competitors are doing right and wrong, and learn from it! You’ll see a graph of ad spend over the last 12 months and estimated ad spend trends for any website. We’re basically giving you all the secrets you need to succeed with ad spend. If you’re building campaigns for clients, you’ll be able to check out specific keywords to understand trends, and gauge the popularity and price of a keyword over time. You’ll also be able to see the industry average ad spend over time.
4. Be the first to identify shifts in ad spend by competitor and/or industry. Evaluate investment per medium based on competitors’ ad spend. This will help you understand which mediums are worth your investment and which you should avoid.

Ad spend data is critical for building a successful campaign. It’s no wonder that marketing experts are searching for this data.

If you’re starting to plan your paid campaigns keep all of these critical formulas easily accessible by downloading them below.

Get The Formulas Now!

This blog was written in collaboration with Allie Kashkash.

FAQs

What is ROAS?

Return on advertising spend (ROAS) helps you understand how effective your marketing efforts are. You can use ROAS on different campaigns to see which are the most successful.

How do I calculate ROAS?

ROAS is calculated by dividing the total campaign revenue by the total cost of the campaign.

Why is ROAS an important metric?

ROAS is an important metric for ad spend as it allows you to assess which of your campaigns are worth investing in, driving revenue and creating profit.

by Sarah Mehlman

Sr. Marketing Intelligence Specialist

Sarah creates engaging content with over 5 years of experience. She enjoys traveling, family time, baking, and Netflix. Sarah holds a psychology degree from Clark University and lives in Israel.