From Clicks to Conversions: Understanding ROAS

Adi Kumar

Feb 17, 2023

7 min read

Return on Advertising Spend, or ROAS, is a crucial metric for any business looking to measure the effectiveness of its advertising efforts. In simple terms, ROAS is a ratio that compares the revenue generated from an advertising campaign to the cost of that campaign. ROAS is used to determine whether an advertising campaign is profitable or not, and to optimize future ad spend.

Understanding ROAS is essential for businesses looking to make data-driven decisions when it comes to their advertising strategy, especially when working with an AdWords management company. By analyzing the ROAS of different campaigns managed by an AdWords management company, businesses can identify which campaigns are performing well and which ones are not. This information can be used to make adjustments to campaigns to improve their ROAS and to allocate ad spend more effectively with the help of the AdWords management company.

In this article, we will explore ROAS in more detail, including how it is calculated, why it is important, and how businesses can use it to optimize their advertising campaigns.

What is ROAS?

ROAS is a metric used in digital advertising to measure the effectiveness of your ad campaigns. It shows you how much revenue you're earning for each dollar you spend on advertising. This metric is especially useful for businesses that rely on digital advertising to drive their revenue. ROAS is similar to return on investment (ROI), but it focuses specifically on your advertising spend. ROI, on the other hand, takes into account all of your business expenses, including things like salaries, rent, and equipment costs. To calculate ROAS, you simply divide the revenue earned from your advertising by the cost of your advertising.

This gives you a ratio that represents the amount of revenue you're generating for each dollar you spend on advertising. Let’s break it down with an example, say you spent $1,000 on a Google Ads campaign and earned $5,000 in revenue from that campaign. Your ROAS would be 5. In other words, for every dollar you spent on advertising, you earned $5 in revenue. It's important to note that ROAS should not be the only metric you use to evaluate the success of your advertising campaigns. While a high ROAS indicates that your advertising is generating revenue, it doesn't tell you anything about your profit margins or overall profitability. ROAS is a valuable metric for businesses that want to optimize their advertising performance and maximize their return on investment. By tracking your ROAS and other important metrics, you can make data-driven decisions about how to allocate your advertising budget and improve your overall marketing strategy.

Why does calculating return on ad spend matter?

Tracking ROAS is crucial for optimizing your ad campaigns and ensuring that you're getting the most out of your advertising budget. By measuring the revenue generated by your advertising spend, you can make data-driven decisions about which campaigns and strategies are most effective and where to allocate your budget in the future. ROAS is also important because it allows you to see the bigger picture of your advertising efforts. While metrics like click-through rate and conversion rate can give you an idea of how users are interacting with your ads, they don't tell you anything about the revenue generated by those interactions. By tracking ROAS, you can see the direct impact of your ad campaigns on your bottom line.

Additionally, ROAS can help you identify areas for improvement in your ad campaigns. If you notice that certain campaigns or keywords have a low ROAS, it may be a sign that those campaigns are not resonating with your target audience. You can use this information to refine your targeting, messaging, and ad creative to generate more revenue from your campaigns. Overall, calculating ROAS matters because it provides a clear and measurable way to evaluate the success of your advertising efforts. By tracking ROAS and other important metrics, you can make data-driven decisions about where to allocate your advertising budget and how to optimize your campaigns for maximum revenue generation.

Tips to Increase Your ROAS

We have discussed why your ROAS matters extensively. Let's explore some ways to improve your returns.

1. Are you tracking it properly?

Before you go ahead and stop a campaign that may have great potential, know that accuracy is key. If your tracking is even slightly off, your reported metrics could be misleading, and you could end up making decisions based on false information. You would not want to be the person who puts all their eggs in one basket, only to realize the basket has a few holes in it. So, take the time to review your tracking and make sure you're getting reliable data. Are you considering your ad costing? Have you included your offline sales and indirect revenue? What model of Google Ads attribution model are you utilising? All these questions add up to the quality of your data. Moreover, understand that accuracy isn't just about avoiding mistakes. It's about finding opportunities for improvement. When you review the accuracy of your tracking, you might uncover some areas where you could be getting even better results.

2. How much are your ads costing you?

No one likes overspending. By lowering your campaign cost, you can not only save money, but you can also optimize your budget for better performance. It's like getting two birds with one stone, or shall we say two conversions with one ad?

It's all about finding that sweet spot where you're getting the best possible results for the lowest possible cost. Here are a few tips to get you started:

1. Optimize your targeting: Make sure you're targeting the right audience with your ads. The more targeted your ads are, the more likely you are to get conversions at a lower cost.

2. Refine your messaging: Make sure your ad messaging is clear, concise, and compelling. The more effective your messaging is, the more likely you are to get clicks and conversions, which can help lower your overall cost.

3. Focus on the quality score: Most ad platforms use a quality score to determine the relevance and quality of your ads. The higher your quality score, the lower your cost per click (CPC) will be. To improve your quality score, focus on ad relevance, landing page experience, and expected click-through rate.

4. Remember to use negative keywords: The average Google Ads account wastes 76% of its allocated budget in targeting the incorrect keywords, so it's important to ensure that your negative keywords list is spot on. Negative keywords are words or phrases that you don't want your ads to show up for, and by using them, you can avoid wasting ad spend on irrelevant or low-converting searches. Use keyword research tools to identify negative keywords that are likely to trigger your ads but aren't relevant to your product or service. By doing so, you can ensure that your ads are only shown to users who are more likely to convert, which can help increase your ROAS while keeping your campaign costs under control.

5. Reduction of labour cost: Consider managing your resources better and more efficiently. See what works better for you, an in-house team or outsourcing the work.

3. Are you getting your money’s worth?

It is important to analyse costs at all stages of a process when it comes to digital strategy. You need to maximise the revenue generation from your ads, and there are a few approaches to achieve this;

One way to do this is by continuously refining your keyword strategy. By analyzing your keyword performance, you can identify high-performing keywords and eliminate low-performing ones. This will help you to better target your ads to the most relevant audience and generate more revenue from each click.
Additionally, using automated bidding tools can help you to maximize revenue by adjusting your bids in real time based on performance data. By automating your bidding, you can ensure that your ads are showing to the most relevant audience and generating the highest possible revenue, without wasting ad spend on low-performing clicks.

By staying on top of keyword refinement and using automated bidding, you can maximize your ad revenue and boost your overall ROAS.

4. Have you checked other avenues?

Consider analysing other factors that affect your ROAS other than ads. There are several indirect factors that impact revenue generation. Maybe while your sales are good, ROAS is still sub-par because the product is not priced properly. Or perhaps if the CTR is great and the ROAS is still dwindling, consider the following possibilities;

The ad copy is not capturing the essence properly
The landing page is not up to the mark in terms of design (unstructured CTAs or copies)
The checkout process is too tedious
The product is expensive and doesn’t justify the cost

These are just some of the many possibilities that affect your ROAS. Outline all possibilities to come up with a strategy that will help you achieve your goals the best.

In Conclusion

To get a more complete picture of your advertising performance, you should also track metrics like cost per acquisition (CPA) and customer lifetime value (CLV), along with return on ad spend (ROAS). These metrics can help you understand how much it's costing you to acquire new customers, how much those customers are worth over their lifetime, and how much revenue you're earning for each dollar you spend on advertising. In case you feel overwhelmed or simply desire better returns, reach out to Saffron Edge. We are a digital marketing agency that has the solutions to all of your digital dilemmas. Contact us today!