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How to Calculate Return on Ad Spend

How to Calculate Return on Ad Spend

When optimizing your PPC campaigns, return on ad spend, or RoAS, is the ultimate metric to keep an eye on. Tracking it enables you to diagnose the bottom line of paid advertising and can show you whether there’s room for improvement in your strategy.

Calculating return on ad spend is relatively straight-forward and simple, and can provide valuable insights into your PPC campaigns’ performance.

One of the best things about online ads is that they are completely trackable, all you have to do is know where to look and what to monitor. This makes the return on investment (ROI) of digital advertising much more transparent than this of traditional formats. Online, every conversion and sale can be traced back to the customer’s first encounter with the brand and through every touchpoint onwards.

Collecting and analysing this information enables you to optimize your budget, identify siloes, fix budget drains, and, ultimately, boost your overall outbound marketing ROI.

However, to make this happen, you have to first delve into the numbers and learn how to calculate return on ad spend.

What Is Return on Ad Spend?

What Is Return on Ad Spend_

Simply put, in digital marketing, return on ad spend is the ROI of PPC campaigns and other digital ads. It measures how many dollars you earn for every dollar spent on advertising.

Marketers track different KPIs to evaluate the performance of paid outreach, but, as mentioned, RoAS is the one that allows them to diagnose the overall health of ads. If the results are lacking, then the company can analyse further to identify the problem and optimize the campaign.

Although RoAS doesn’t in itself provide solutions, it clearly shows the bigger picture and provides an answer to the ultimate question – is your ads budget worth it?

If ads don’t deliver a sufficient return, they should be paused and reevaluated. After all, the goal of advertising is to increase sales and profits. When they fail to do so, you may find out that it costs you more to advertise and sell a product than it’s worth. If this is the case, your business is operating at a loss and adjustments need to be made.

What Is the Ideal Return on Ad Spend for Your Business?

As any other metric, without context, return on ad spend is just a number. How much is the ideal value for a business depends on the industry, the product, and many other factors.

So before we focus on how to calculate your current RoAS and how to fix it, let’s have a look at how to find out what you need the number to be, in order for your ads to be profitable.

The general benchmark for RoAS is considered to be between 3.0 and 5.0. This means that for every dollar spent on advertising, you should be getting $3-$5 profit. However, some businesses need more, and some are doing fine with far less.

To find out your golden ratio, you should first calculate your net profit margin % (NPM%), i.e. how much profit you make from a sale when you draw the line.

To estimate this, you should add up all expenses involved in making the sale, subtract them from the revenue and divide them by the revenue, following this formula:

Net Profit Margin % = ((Revenue – Costs) ÷ Revenue) x 100

Your revenue is how much you make from a sale, and your costs will include operating expenses, costs of goods sold, taxes, and any other relevant outlays you can think of.

Now, let’s get back to your ideal return on ad spend (IRoAS). Your goal is to achieve 100% profit, so to that end, you have to use the following formula:

NPM% x IRoAS = 100%

For example, if your NPM% is 25%, then your ideal return on ad spend will be 4.0.

It’s important to note that the IRoAS is the minimum you should strive to achieve. Your goal should be to reach and exceed this number, and falling below it will mean that your ads are operating at a loss.

What Is the Ideal Return on Ad Spend for Your Business_

How to Calculate Return on Ad Spend?

Now that you can estimate how much you need the RoAS to be in order for it to be profitable, let’s focus on how to calculate return on ad spend for your current campaigns.

The formula, as mentioned, is simple:

Return on Ad Spend = Conversion Value ÷ Cost

How to Calculate Return on Ad Spend-1

The conversion value equals the revenue the ad delivered, and the cost is how much it cost you.

For example, if you’ve paid $50 for an ad and you generated $100 from the sale, this means that your RoAS is 2.0. For every dollar you spent, you made 2 dollars. Which, honestly, in most cases, is not great.

However, if the ad cost you $50 but you generated $500 from the sale, then you have s RoAS of 10.0, and $10 for every 1 you spent is a much better profit.

Here’s how to calculate return on ad spend for the two main types of campaigns – commercial and lead generation:

How to Calculate Return on Ad Spend for eCommerce?

How to Calculate Return on Ad Spend for eCommerce_

Understanding how much a sale costs you is especially important when building an eCommerce strategy. In this type of campaign, knowing the exact value of the product, and how much you spend on selling it can be of great importance for your revenue.

As mentioned, if more often than not your outbound outreach investment exceeds the profit, your business may be headed downhill.

However, there are occasions when selling the product may be more important than making profits. For example, if you are clearing warehouse space for new stock you may want to get rid of the old items, and care more about this, than how much you will make in the end. The same applies if you want to boost sales volume on low-performing products.

Therefore, when adjusting RoAS in order to fine-tune your eCommerce strategies, you should keep the end-goal in mind.

That said, the best way to track RoAS for commercial campaigns is to set up dynamic conversion values in your Google Ads account. This way, the algorithm will calculate the results for you and you will have an overview of how they relate to other relevant KPIs.

For optimal results, you should enable enhanced eCommerce tracking in Google Analytics, and add conversion tracking to Google Ads. You will be able to better track both your customer’s behavior and conversion values.

How to Calculate Return on Ad Spend for Lead Generation?

To track and calculate the return on ad spend of a lead generation campaign, you should assign a flat conversion value to your Google Ads tool.

Depending on the campaign, there may be different actions that you consider conversions – filling in a form, signing up for newsletters, calls, downloading a lead-magnet, free trial subscriptions, etc.

You should estimate how much a lead performing action is worth to you, and make this your conversion value.

Make sure that your calculations reflect the real value of the conversion. You should take into account how many of these leads you close and successfully become your clients, how much nurturing them costs you, and how much their potential lifetime value is.

By leveraging these numbers, you can set a realistic conversion value for different client actions, and calculate RoAS accurately.

How to Increase Return on Ad Spend?

Even if your return on ad spend hits the benchmark for your industry and your business, you should strive to increase it. The best way to do this is to optimize your ads and improve their performance.

How to Increase Return on Ad Spend

Here are a few things you should keep an eye out for:

  • Negative keywords. If your ads are triggered by the wrong searches, you may be losing money instead of gaining clients. Your ads will cost you clicks and impressions, but will lack in conversions.
    Monitoring for negative keywords and filtering them out, will ensure that you are paying for high-quality opportunities and leads. This way, you may both decrease the cost and increase the conversion value.
  • Ad copy. The goal of ad text is to convey a message and convince the user to click. Making it compelling and to the point can increase your click-through rates and conversions.
    You should A/B test different versions to find out what phrasing and formatting delivers the best results.
  • Landing pages. If users click on your ads but rarely convert, there may be something wrong with the landing page. Revising the information, and adding a powerful CTA can affect the actions the user takes.
    This can, ultimately, reduce your costs and improve RoAS.
  • Keyword groups. Breaking down general keywords into groups of long-tail keywords can dramatically improve your ads results. When people see search results, be they organic or paid, that match exactly what they need, they are more likely to click on them and convert.
    Long-tail keywords that include different product specifications such as color, size, and style, are more compelling and deliver better results.
  • Budget optimization. Make sure to properly distribute your budget depending on how expensive the product is. To ensure optimal results, the item’s price and ad’s cost should be correlated. Otherwise, the bottom line conversion value may not be worth it.

Bottom Line

Ads are amongst the most important assets in your digital marketing strategy. Calculating return on ad spend allows you to track their performance by focusing on what matters – results and ROI.

A simple equation provides insights into the overall health of your ads, and enables you to diagnose issues that may otherwise stay unnoticed. Depending on the type of conversions, there are different ways to approach your calculations and determine conversion value.

However, whichever way you choose, consider starting out by finding the minimal RoAS so you can ensure your campaigns’ profitability. This will also provide a benchmark you can strive to meet and exceed, and will enable you to optimize results.

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