How Much Return on Ad Spent Is Good Enough

Understanding how to calculate the return on ad spend is very important for helping a business determine its true customer acquisition cost (CAC). You’ll learn more about the relationship between ROAS and CAC later in this piece. Also, you’ll get an overview of different tools for calculating ROAS and tips for how to improve your ROAS.

What is Return On Ad S pend (ROAS)?

Return on ad spend (ROAS) calculates the revenue an advertising campaign earns compared to its cost, measuring how effective a team is with its digital advertising investments.
Simply put, a return on ad spend is the amount of money earned by an advertising or marketing campaign matched against the amount spent on that campaign.

ROAS can reflect campaign, channel, or platform-specific results through monthly, quarterly, or annual snapshots.

What is a Good Return on Ad Spend?

A good average ROAS is around 3:1 or 4:1, or a 300% or 400% return on ad investment. However, ads that run on the Google platform might generate three or four times that ROAS.

The ideal ROAS varies based on a few factors:

1. Advertising goal – If the goal is to drive sales, a higher ROAS is better. If the goal is to drive brand awareness, however, a lower ROAS is expected.

2. Business model – A company’s business model will affect the average customer lifetime value and expected turnover rate. Companies may have high customer acquisition needs depending on their average customer behaviour.

3. Industry – Some industries rely on widespread marketing efforts, whereas others target very distinct customer personas.

A minimum ROAS threshold could be the break-even point, in which the advertising costs equal its revenues. A negative ROAS —such as if a company spends #1,000 on advertising and earns #500 — suggests an urgent need to rework the campaign.

How Do You Improve Your ROAS?

What is a good ROAS? Generally speaking, if your ads are producing enough revenue to cover your campaign costs, that’s a positive sign. If they’re not, you’ll want to figure out how to improve ROAS. And even if your ads are generating healthy revenue, it never hurts to aim higher — provided you don’t overextend your resources in the quest for a small bump in revenue.

With clean data available, additional best practices for improving ROAS include:

Set clear campaign objectives – Define a clear goal of the campaign and use this goal to understand the minimum acceptable ROAS.

Test ad formats and platforms – Constant testing is the only way to learn what strategies perform best with an audience. Try new ad formats and platforms to find the optimal combinations.

Create targeted/segmented audiences – Invest in the necessary customer segmentation to ensure ads are hyper-tailored and delivered to customers with the highest likelihood of engaging with the content. Ad spending is wasted when organizations target broad audiences with generic messages.

Optimize creative and copy – Test every ad element in isolation, including messages, keywords, and design choices. Even something seemingly small, like font choice or color, could have a big impact on the campaign results.

Implement conversion tracking and attribution – Adopt solutions and implement strategies to help monitor customers in their online journey and effectively track whether they make a purchase (even if that’s days or weeks after viewing an ad).

Maximize your average order value (AOV)- Getting your customers to buy more when they order online is another way to improve ROAS. If your average order value (AOV) is higher, the return on ad spend should be higher, too. To calculate AOV, take the total revenue from all sales and divide it by the total number of orders. Total revenue from all sales ÷ total number of orders = AOV

Refine audience targeting- Precise audience targeting is good for successful advertising. Delivering your message to the right people significantly increases the likelihood of conversions and boosts your ROAS. By carefully defining and refining your target audience, you can optimize your ad spend and maximize returns.

Experiment with new ad creative- The visual and textual elements of your ads play a crucial role in capturing audience attention and driving conversions. To optimize your ROAS, invest in creating a compelling ad creative that resonates with your target audience. Experiment with different visuals, headlines, and calls to action to identify what works best.

Marketing experiments are necessary to assess the results of any marketing effort, which is the basis for the ROAS calculation. A marketing organization needs a robust experimental campaign strategy to properly evaluate the impact of each marketing test or intervention.

Advantages And Disadvantages Of ROAS

Advantages

• Easy to calculate and provides real-time insights.
• Guides resource allocation to impactful campaigns.
• Tracks ad spend efficiency effectively.

Disadvantages

• Focuses only on spend and revenue, missing broader metrics.
• Requires assigning monetary values for non-monetary goals.
• Ignores the impact of other channels, like email or SMS.