Return on Ad Spend: The Most Important Metric to analyse for your Digital Marketing strategy
28th Feb, 2022
Digital Marketing, regardless of which digital platform it’s executed on, still remains the most measurable marketing medium available today. From measuring reach, to how many people clicked on your ads, to what they did after seeing your ad.
Powerful tools like Google Analytics, take data mining on your digital marketing efforts to even higher levels, recording various aspects like:
- How much time people spent on your digital asset(s)
- How long it took for your asset(s) to load
- What your most visited page or pages are
- What types of people, in which areas, are your most frequent visitors and also
- How many leads like calls, emails and more, you’ve received from your digital marketing efforts.
This has created a range of interesting and measurable digital marketing metrics like cost-per-impression, cost-per-click and even cost-per-lead.
But often, one can get lost and confused in these metrics by using them as a base to analyse what the return on investment (ROI) is.
It is important to measure your CPM, CPC, CPO and CPL against the available digital space in your industry, as well as, how much competition there is in your industry, as an indicator of how optimised your digital marketing campaigns are.
However, your overall marketing strategy, including your creative messaging strategy, sales cycles & processes, business USPs, the value of each sale to a business etc. are all factors that determine what an actual ROI calculation should or would be. So, if every business is different and has mitigating circumstances influencing their return on investment calculations, what then, should a business also measure? The answer is: Return On Ad Spend.
What is Return On Ad Spend (ROAS)
Return on ad spend is the calculation of measuring how many sales and the value of those sales against only your ad spend investment. For example; You spend R10 000 on Google Ads and receive 100 leads. Your cost per lead is R100. Your sales conversion rate on those leads is 30% and you, therefore, make 30 sales. The value of each of your sales is R1000, which means you have generated a total of R30 000 in sales. Your Return On Ad Spend is then R30 000 divided by R10 000 (which was your ad spend investment) multiplied by 100, equalling 300%.
Although the calculation can be applied to other ad spend mediums, like print, brand activations or even radio and TV, it is easiest to implement on digital marketing because of the extensive tracking methods available and the ability to seamlessly integrate into a business CRM system. However, if you have the time and internal capacity to track your sales, relative to your marketing campaigns flighted on other mediums, it is well worth the effort.
ROAS vs ROI: What’s the difference?
Return on investment measures the total efficacy of a marketing campaign including ad spend, people, tools, processes and whatever else is required to generate revenue from that campaign.
Return on Ad Spend focuses on the sales generated by a particular marketing medium and the applicable ad spend invested to generate a sale, for that medium alone. Applying ROAS calculations to your marketing campaigns, allows a business to identify which channels generate better sales, more sales or even analyse the types of sales a channel generates. This information, when properly used, then forms a baseline of where to spend your money best, to ultimately improve your marketing return on investment.
Why ROAS is an important metric
Marketing is diverse. It starts with your corporate identity, leads to how you brand yourself creatively, what your creative messaging strategy is (what you are saying to who and why) and how all of these elements can be translated into a marketable campaign through a multitude of mediums. The main effort of marketing is to improve brand awareness and in turn, leads that translate into sales.
Digital marketing can often make this already complicated and skilled process, even more complicated. Digital marketing platforms include Search Engine Marketing (SEO and Google Ads), Social Media (with each platform rather diverse from the next), to direct marketing campaigns through Email and SMS. All these digital marketing mediums require digital content generation before you can use them. Each of these channels also serves a different purpose in your digital marketing strategy:
Each type of marketing medium comes with a compelling argument on why you should invest in them and even more so, with digital marketing mediums. However, each industry and business has a different typical customer with separate behaviours and interests.
Understanding how best to reach your typical customer and which digital marketing medium converts them best for you, is crucial, especially if you want to improve your marketing return on investment.
When you have implemented return on ad spend calculations and have a relative amount of data, you are able to identify which digital marketing channel delivers the most conversions, the highest conversion value or even the highest quality conversion.
This information greatly assists businesses in planning future ad spend, marketing campaigns and where to best invest, relative to the sales they want to achieve.
What is considered a good return on ad spend ratio?
At an absolute minimum, 100%. No business wants to be investing in marketing that doesn't translate into at least the same amount of sales. However, most businesses aim for and consider a 400% ROAS ratio to be good, even though in reality most businesses only achieve a 200% ROAS ratio.
Your ideal ROAS ratio will be affected by your industry, the type of business you run, the size of your business and other metrics like your cost of sale.
Take all of these aspects into account when planning your own desirable ROAS ratio, but remember you need to at least have some ROAS data before you can plan a desirable ROAS ratio.
How to track ROAS
If digital marketing is your preferred marketing medium, then implementing a way to track ROAS is simple.
If you have a CRM system, you can set it up to automatically ingest your leads from your digital marketing assets, simply through APIs (application programming interfaces, which is a connection between computers or computer programmes).
For example; LeadTrekker, a South African CRM system developed for South African businesses, allows the following digital channels to be integrated into your CRM system:
- Website enquiry forms
- Facebook Leads
- Google Ads Leads
- Call Leads
- Email Leads and so much more
Once you are able to track all your leads and where they are coming from, you will be able to track which lead generated the sale and which marketing medium generated the lead.
Implement an internal spreadsheet to analyse the Return on Ad Spend per digital marketing channel, recording your ad spend and the number of sales generated on that ad spend, over a specified time period.
Remember, to track your Return On Ad Spend, simply tally up the value of your sales, per marketing medium, divided by the investment on ad spend for that medium, over your specified time period, to realise your ROAS ratio.
How can you apply your ROAS metrics to improve your digital marketing performance?
Once you have accumulated baseline data on what your ROAS ratio is, there are a number of ways you can apply your data to your campaigns to increase their performance.
- Automatically through Bid Strategies:
Digital publishers like Google & Facebook monetise their platforms by selling ad space. Their ad sales platforms perform like an auction - the highest bidder gets the space (amongst other criteria like the relevance to the specified target audience and user experience of the landing page, website or other digital assets). Their success is placed in their objective-based costing model; you only pay for the ad space once the advert has achieved the objective you set out for it to achieve.
In Google Ads, you can apply a ROAS bid strategy as well as set a target % of Return On Ad Spend. Google’s machine learning capabilities then maximise your campaign to achieve the metrics you have set.
Likewise, both Facebook and LinkedIn also offer ROAS bid strategies. However, it's important to note that you can’t apply these bid strategies if you haven't set up trackable conversions like a website purchase and your ad account hasn't realised a minimum of 30 conversions of the said purchase event.
This type of application works extremely well for e-commerce websites, and if you partner with a good e-commerce website partner like Shopify, they automatically include ROAS calculations in your Shopify admin panel.
- Manually, using your own calculations to plan your media spend:
Once you have applied an internal process to calculate your return on ad spend, you will be able to manipulate your data further to understand:
- What your reach per digital platform is
- What your cost per lead per digital platform is
- What your cost per acquisition or sale is, per digital platform
- Which digital platform delivers the most sales
- Which digital platform delivers the highest sales value
- Which digital platform delivers recurring customers
And so much more!
Use this information to plan out your ad spend and preferred channels for future campaigns with the ultimate goal of improving your total marketing return on investment.
We live in an age where information and data are readily available. Digital marketing is as powerful as it is because it's fully measurable and has a multitude of measurable touchpoints.
If you really want to maximise the potential of your digital marketing efforts, Return On Ad Spend needs to become an important digital marketing metric you record and analyse. It is a crucial metric assisting with better campaign planning, ad spend planning and ultimately to improve your ROI.
For any assistance on implementing and analysing your Return On Ad Spend calculations or using the data to better plan your digital marketing efforts, contact our Digital Strategists at Ideation Digital.
Our Promise to you:
Will will partner with you and guide you on your digital marketing journey. With strategic planning and comprehensive reporting, we are geared to increase your digital footprint and improve your digital marketing results.