Return on Ad Spend
Recently, digital marketers have been inundated with this term. Google is shouting it at us, industry publications are proselytizing it, and some digital marketing department heads love it. But we exist in a bit of a bubble. It often seems like most outside of the industry have never considered this particular marketing version of Return on Investment. Return on Ad Spend (ROAS) is very similar - you simply divide how much you made from ads by the amount spent on ads.
But one side of this equation can still be a challenge for some to nail down: How much do you make from ads?
Granted, it’s a relatively new advancement to be able to tell what source sales came from — organic search, paid search, social media, etc. Before digital marketing, knowing how much revenue an advertisement produced was little more than a guess. You compared the period before the ad vs. the period with the ad, and just hoped there weren't other factors influencing the data. Now that we can directly connect how many conversions came from an ad, it should be easy to find a Return on Ad Spend, right? Well...
With Google’s increased focus on AI-based bidding, Target Return on Ad Spend has been singled out as the Next Big Thing. This automated bidding setting optimizes for conversions based on the conversion values you set and what you determine as your Target ROAS. So if you have a 500% Target ROAS and your conversion is worth $100, Google will make sure that on average your costs per conversion don’t exceed $20. They do this by adjusting bids in real-time, based on a user’s device, browser, location, or even the time of day.
But how do you know your conversion is worth $100? Is that just the cost of the product you’re selling? Is it just a random number? How does that even apply to lead generation?
All great questions! But first, let’s take a step back.
What’s a Conversion?
A “conversion’ is a desired action a user takes on your website. This can be filling out a form, making a purchase, or even just clicking through to your site to get directions. These should be based on your business objectives. Are you trying to acquire leads? Make sales? Get in-person visitors? Once you figure out which conversions you care about we can look at the conversion value. (If you have more questions about conversions, check out this blog)
Online Sales ROAS
If your conversions are online sales-based, that’s generally pretty easy: the conversion value is how much you make on the product (your margins). But, why not set it to just be the gross profit? After all, Google doesn’t really care — you could set it to any random number to make Google “value” one conversion higher than another.
The reason you’ll want to use your margins instead of gross profit is so you actually make money on these sales. If Product A’s gross profit is $10 and Product B is $5, and you put those numbers into Google, Google will try and sell more of Product A. However, if Product A costs $8 to make and Product B only costs $1, you’re leaving a lot of money on the table. Using the profit margins instead, Product A at $2 and Product B at $4, will produce a much more favorable result.
Lead Generation ROAS
If your conversions are lead generation-based, this may require a little more math. You’ll first need to map out your lead-to-sale journey, AKA what steps occur between a lead and a sale. This is valuable even outside of ROAS. What happens after a user becomes a lead is both incredibly important to your digital marketing program and completely out of their hands. Digital marketers can use the information about which leads become sales to inform how they target audiences, what ad copy to use, what keywords to add.
To find the value of a lead, you start with the average value of the final sale, identify the conversion rate between each step, and work backward to find the value of each step by multiplying its conversion rate by the value of the next step. That looks a little something like this:
So Why Should I Use ROAS?
If this all sounds a little complicated, it is. And that’s why not many organizations use it. But knowing your margins, knowing the steps in your customer’s sales journey, and knowing where any pain points to conversions are can greatly improve your digital marketing program, whether you’re using Target ROAS or not.
We love talking about digital marketing. If you have any questions about starting a program or if you want to learn more in general, contact us at firstname.lastname@example.org.