Knowing the potential value of online advertising is vital to avoid expensive misfires and mistakes. Factory Pattern’s simple guide to understanding ROAS – Return on Advertising Spend – helps to ensure your ecommerce PPC and other campaigns are effective.
In the hunt for ever-improving sales volumes, eCommerce ventures (and in fact all businesses) can fall into some bad habits. One is to spend money on digital advertising campaigns such as Pay Per Click including Google AdWords without first developing a clear strategy.
This can lead to online ad campaigns with poor response rates. Alternatively, you may enjoy a surge in website traffic that does not translate into a healthy increase in your lead conversion and sales.
Generating lots of website visitors who have no interest in your products is a terrible waste of your advertising budget!
The linchpin of any online advertising is understanding where and how your money should be spent, maximising the chances of getting genuine customers interacting with your pages.
In other words, you need to focus on what gets you the best return from your advertising budget, otherwise known as ROAS.
What is ROAS and how to calculate it?
ROAS is a handy way to calculate the potential revenue from online ads, compared to the cost. How do you calculate Return on Ad Spend?
It’s a simple matter of dividing the revenue achieved, by the cost of the advertising.
ROAS Calculation: Revenue ÷ Advertising Cost = ROAS
So, for example, you spend £1000 on an online ad campaign and you got an upsurge in website traffic. Great, but what are your sales and what’s your ROAS? Here’s some examples below:
- If you got only £500 worth of sales (1:2) from the ads, it’s a poor return and you need to rethink your strategy.
- If you got £1,000 in sales (1:1) is not necessarily a disaster if you’re building brand awareness and customer loyalty.
- If you achieved £2,000 worth of sales from the campaign, dividing that by the £1,000 (1:2) your spend shows a health x2 return. That’s the sort of level you need to aim for (and exceed).
ROAS based on profit
It can make this process even more effective if you highlight your profit – not just your sales – and divide that by your spend. You get an even clearer picture of how effective your ads are proving when the unit cost of your products and delivery charges are subtracted from the equation. Not least as fulfilment can be a substantial drain on eCommerce revenue.
So, that would be: ad revenue minus the cost of the product and its fulfilment, divided by advertising spend = the true return on your campaign spend.
An example to calculate achieving a Revenue of £2000, first minus your product and fulfillment of £1000 and divided this by your ad spend = ROA
Using ROAS to devise online ad campaigns
Getting a firm handle on what is – and what is not – working in terms of generating sales is particularly vital for planning ahead to grow eCommerce businesses. Online retailers can use ROAS to pin down where changes need to be made, to make every pound they spend more effective.
If an ad activity is bringing in a strong return on investment, it’s worth expanding or repeating. Ineffectual activities show you need to refocus the campaign or shift your ad spend to a different opportunity entirely.
What are the options for online ads?
If a quick RAOS calculation does throw up serious concerns, it could be you need to refresh your knowledge of your online advertising possibilities.
The list of ways to advertise online gets bigger all the time but includes:
- Product Listing and search ads – that appear when an internet user refers to a product you sell.
- Google Display ads – based on Google AdWords, these are ads that are displayed when internet users browse, watch YouTube videos or check Gmail, appearing across devices and apps.
- Social media advertising – paid for posts and various other ad opportunities on all the major social networks, including Facebook, LinkedIn and YouTube.
The costs involved depend on the specifications of your campaign – the bigger the likely audience the bigger the cost.
You could be charged for some ads as Pay Per Click (PPC) which drives traffic to your site or Pay Per Lead which involves verifying the user’s interest in what you sell!
ROAS is clearly a handy metric for measuring and improving ad spend and helps to ensure you spend your digital marketing cash wisely and well.