Return on ad spend, or ROAS, is one of the most overlooked search metrics in paid search campaigns. Online advertising is all about driving sales to your business and targeting potential pass-through customers. Paid search advertising connects the money spent on a campaign to generated revenue. Since every aspect of a paid search campaign isn’t necessarily a good investment, ROARS can help identify which aspects are working best.
In order to calculate ROAS, it is necessary to know which campaigns and keywords are actually producing conversions. So, to improve performance, conversions and sales must first be tracked. This is relatively simple with most paid search platforms. The ROAS metric will work with most common conversion type tracking.
Make Marketing Decisions Based On The Right Data
Research has shown that less than thirty percent of advertisers are tracking conversions effectively, and most don’t track return on ad spend. It is best to make marketing decisions based on ROAS data. Click and conversion data metrics can guide marketing, but decisions that aren’t based on ROAS data could negatively affect profitability.
Clicks Are Unreliable For Marketing Data Basis
Marketing decisions based on clicks can be based on erroneous or irrelevant material. The click-through rate probably includes all sorts of irrelevant clicks which have nothing to do with conversions. Investment decisions for marketing campaigns should include the ROAS, or return on ad spend, to ensure legitimate results.
Conversion Data If Filling the Funnel
A conversions rate is an important aspect of marketing and must be considered in the appropriate aspect. However, it does not show how well a campaign produces new revenue. Conversion data only shows new people in the funnel. Those people are necessary and important to the campaign, but they are not yet sales on which to base marketing investment data.
Click and conversion stats are important, but they do not show profit margins. A campaign may look like its performing great at first glance because of clicks and conversions but when the ROAS is analyzed, the truth is revealed. The ROAS will show the profit margin and if the campaign isn’t showing a good ROAS, then it could be in trouble.
Paid search campaigns must bring in more than 1XROAS to be profitable. This is only a one time return on ad spend and it is not enough to benefit the bottom line. Unfortunately, the case is the same with 2XROAS. This is just the break-even point, but it will never make a profit. It is necessary to have a 3X return on ad spend to start making money. A 3XROAS should be the minimum acceptable rate for marketing campaigns. A 4XROAS typically covers fixed and variable expenses with a bit of a profit in the end. A 5XROAS means that paid search campaigns are doing well and the business is probably turning a decent profit, which is also the right time for it to grow. Every element of the campaign may not perform a 5XROAS, but as long as the threshold is maintained as a whole then business is good.
ROAS Rule Of Thumb
The rule of thumb for return on ad spend is to shoot for a 4XROAS on campaigns. The 3XROAS is just the break-even point and still needs work. “Branding”-type campaigns don’t fall into this category, but most paid search campaigns are directed at low funnel marketing.
ROAS is a handy tool to look at each specific element of a campaign but it is important to analyze big enough data to get relevant information. There needs to be a minimum of one hundred clicks. As long as there is enough data this is a great way to analyze specific elements that may need improvement or elimination.
ROAS is one of the most valuable paid search metrics available. Unfortunately, it is rarely used. It does take some work to get the tracking set up, but it is worth it in the end. Once the tracking is set up, it can be used to identify weaknesses in a campaign. Specific goals may vary but using ROAS data to evaluate marketing campaigns can grow the bottom line.