If you’re a newbie to paid advertising (Facebook ads, Google ads, Pinterest ads, YouTube ads, Tiktok ads, etc.) ROAS, you’re in the right place. Finding out what it actually is and how it can influence your site metrics is important. However, it can be complicated as well. Many factors can affect how ROAS functions and what it can tell you from ad to ad. Let’s explore what ROAS actually is, how you calculate it, what affects it, why you should care about ROAS, and what it actually tells you.
So, what is ROAS?
ROAS stands for return on ad spend. In other words, it’s the power of showing an ad to someone, and if that ad makes them buy your product. This might sound simple enough, and the calculations themselves might not seem tricky, however, there are many factors that can affect your ROAS.
How do you calculate it?
The equation to figure out your ROAS is to simply add up your revenue from ads and then divide that revenue by the money you’ve spent on ads. So, for example, if you made $500 in revenue and you spent $100 on your ads, your ROAS ratio is 5 to 1. So, for every $1 the company spends on that ad, they get $5 in revenue back. It’s an interesting metric that can give you a lot of information and help you make better decisions about where to put your ad spend. However, there are several factors that can affect ROAS that you can’t see from this calculation.
Things that can affect ROAS
While useful, ROAS can also be a bit finicky. There are things that can absolutely destroy your return on ad spend. Here are a few examples that you need to watch out for as you are creating ads and spending money to post them.
CPM stands for cost per mille. This might sound like a funny thing to relate to ad spend, but it’s a fun way of saying the price for every 1,000 impressions you receive from an ad. In other words, it’s the cost to get impressions out of your potential customers. The higher the CPM is, the higher the overall cost of the ad campaign will be and the lower your ROAS will be because it’s costing you more money to get the message out to people. When you show your ads and messages to fewer people, that means fewer opportunities for you to make the sale.
This can be closely tied to your audience. You might be reaching a wider audience with a lower CPM, but in turn, you might not be reaching enough of the right people to sell your product. On the other hand, if you have a high CPM, you’ll probably reach more people that will buy your product, but the cost to reach them is much higher. So, these are things to keep in mind as you work out where you’d like to put your ad spend. This can make or break your ROAS.
CTR stands for click-through rate, and it also affects your ROAS. While you might be getting a higher click-through rate on your advertisement, you could also still be getting a bad return on ad spend. This is greatly affected by your audience. Maybe they really like what they see in the ads but not on the website. Or maybe the purchase decision requires more than just this one visit to your site.
Be aware that a high CTR can easily lose its effectiveness if CPM is on the rise. Whenever it costs more to show ads to people ROAS stands a good chance of taking a hit.
The difference in CPC and Cost per Landing Page View
CPM may be low, CTR may be high, and you may be throwing yourself a little party for your low CPC, or cost per click. Yet sometimes sales just won’t materialize. We recommend checking your cost per landing page view. A landing page view is registered when someone clicks your ad AND THEN waits for the landing page to load. If you have site speed issues, many people are going to hit the road. That means they won’t see the product and they won’t even browse your site. So it’s important to compare the number of clicks on an ad to actual landing page views. If there is a big difference then there is a problem somewhere in between.
Landing Page Distance from Purchase
Another thing to keep in mind with ROAS is the distance of your landing page from the purchase. You want to make purchasing your products as easy as possible for your customers. Things like in-app browsers can make their experience much slower and more glitchy. So, that’s something to keep in mind. It’s also important to make the buying process seamless. By having the best pricing, features and benefits prominently displayed, multiple payment methods, and multiple shipping options can make the ease of checkout so much faster and more tempting to buyers.
Why is ROAS important?
So, why are ROAS and all of the factors surrounding it so important? Well, overall, ROAS informs you how you should spend your money. Which ads are generating the most revenue and which ones aren’t generating as much. Once you can hone in on this, you’ll be able to put more of your ad spend towards advertisements that get you more sales.
While ROAS will give you a ratio you can use for this, don’t forget to watch your CPM, CTR, CPC, and the landing page metrics. All of these things can help you get a much bigger picture than just the ratio that you get from calculating your ROAS.
What does ROAS actually tell you?
ROAS can give you insights into many things when you look at all of the metrics behind it. As we’ve talked about, it can tell you where your ad spend should go. However, it can also tell you something about how potential customers are interacting with your website. In today’s eCommerce-heavy world, the user experience is so critical to getting sales. The metrics that you look at while calculating your ROAS can also help you hone in on this user experience that can really change the game for you and your business.