Help Guide Marketing budget spend

If you run digital ads on Twitter, Amazon, or Google, you’re likely tracking clicks on your campaign. While clicks are important, cost per click isn’t the most valuable metric.

Marketers should include return on ad spend (ROAS) in any report. Inspecting campaign ROAS provides deeper insight into digital ad spend and helps improve the quality of marketing budget decisions.

What is ROAS?

ROAS is an attribution metric that relates sales revenue to advertising spend. It represents conversion value versus ad cost as a ratio of product revenue divided by product ad cost (or spend).

Say you have $100 in sales for an ad group and you spent $25 on digital advertising. Your ROAS is $4 for every campaign dollar spent.

The goal of return on ad spend is to have as high a ROAS value as possible. A high ROAS indicates that the conversion value is worth the advertising cost, as the revenue exceeds the cost as the campaign progresses.

ROAS is associated with social media advertising, so you’ll likely see the metric in Ads Manager for a given platform. However, each platform takes a slightly different view of the metric, although the fundamental purpose of the ratio – revenue to advertising budget spent – is the same. Facebook, for example, has a website purchase ROAS, which takes the conversion value on the user’s website divided by the total amount spent on Facebook ads.

Another example treats ROAS as a benchmark. Google offers Target ROAS for Google Ads, which allows marketers to create a smart bidding strategy aimed at getting more conversion value or revenue at a target ROAS. Using target ROAS, however, has a few key prerequisites. A requirement is a set of conversion values ​​and 20 conversions in a minimum of 45 days. Marketers should also plan for a buffer budget, roughly double the daily budget for ROAS, to cover any fluctuation in daily expenses.

Related Article: New Facebook Ad Metric Matches Spend to Cross-Channel Experiences

Why ROAS is important for marketing

The choice of ROAS is important for a campaign analysis because it treats marketing as an investment rather than an expense, as cost-per-activity (CPA) metrics do. A cost per click reminds the marketing team that they’re spending on every click, but doesn’t remind the team to ask another important financial question: What is the revenue-generating activity associated with this expense?

ROAS answers this question, providing a better comparison of value within each ad group. It is possible to have a high conversion and yet a low ROAS. The cost per conversion of two campaigns can be the same, say $10 per click. But if each campaign is for two different products, each with a different revenue, then the ROAS for one will be greater, indicating a campaign with greater value. Thus, examining ROAS with a CPA metric reveals a broader financial picture to guide which campaigns to invest more in.

Related Article: Stop Over-Promising Content ROI and Start Delivering Content ROE

Planning a ROAS analysis

To create your own ROAS calculation, you can export each ad manager’s campaign data to a CSV file, then import the sheets to an Excel spreadsheet or Google Sheet. You can then create a dedicated sheet that links the fields of these tabs and calculates the ROAS formula.

A campaign review can now quickly reveal better insights into the extent to which marketing spend will attract the desired audience. Campaigns that seem expensive can turn out to be more than profitable if the products in question are high margin and the ROAS is high.

In the example screenshot above, we see the total ad spend, total sales, and ROAS for four different campaigns. Campaign D’s sales are the lowest of the four campaigns, but its ROAS is similar to that of Campaign A, which has the highest sales among the campaigns. If each campaign promotes the same product or service, you can make the case to a manager looking to cut their budget that the return on the high-spend campaign is as effective as the one that generated the fewest sales. In this case, it would make more sense to remove Campaigns B and C because their combined ad spend is higher than A and D combined, but both have lower ROAS.

ROAS analysis is a solid starting point for deeper conversations about which campaigns to refine, which campaigns to invest more in, and which campaigns to retire.

Related Article: How to Provide Credible Marketing Pipeline Forecasts

Social trading will drive the need for ROAS analysis

The explosive growth of social commerce, fueled by the stay-at-home restrictions of the COVID-19 pandemic, will certainly open up more questions around which social media campaigns shape sales. eMarketer forecasts that US retail social commerce sales will reach $36.09 billion this year, an increase of 34.8%. It also updated its forecast growth rate from 19% to 37% due to an expected spike in sales.

Marketers who rely on social media commerce are starting to look at return on ad spend metrics to get the most out of their limited social media marketing budgets.