ROAS, or return on ad spend, is a vital metric for advertising online—especially for e-commerce businesses. It helps determine which ad campaigns are most effective and can help decision-makers focus marketing spend.
One of the reasons why so much advertising spend has moved online is the ability to track sales and revenue all the way down to individual clicks. This allows advertisers to measure ROAS. In turn, measuring and optimizing ROAS ensures that more money is coming in than being spent, which is crucial for managing business cash flow.
Unlike e-commerce advertising acquisition metrics like cost per acquisition (CPA), ROAS accounts for varying cart sizes. For example, CPA measures how much it costs to bring in a new customer. If a customer spends $50 or $5,000, it doesn’t change the CPA in any way—although those shoppers are vastly different for a business. ROAS, on the other hand, adjusts for the dynamic nature of online shopping.
While a metric like CPA is useful if lead generation is the first stage of your sales process, ROAS is more beneficial further down the funnel. It’s the metric you need as your company gets better at targeting “higher value” customers and takes control of the budget in this cash-strapped time.
How to Optimize ROAS
Calculating your ROAS is fairly straightforward if you advertise online. You simply take the total revenue associated with your ads from whatever advertising channels you use (like Google or Facebook) and divide that by the amount spent.
Offer add-ons before checkout, including small upsells or extras, to see a notable boost in ROAS even if only a small percentage of customers take the bait. Better yet, offer add-ons that come recommended by other customers or that are based on the content in the buyer’s cart.
If you’re disappointed with the result, that’s OK. There are several ways to improve your ROAS and get more out of your marketing budget:
1. Cut out all inefficient spend.
Your ROAS will instantly get a boost if you remove any spend that doesn’t lead to sales. Half of the ROAS puzzle is ad cost—lower that cost without hurting revenue, and you tip the scale in favor of your revenue while improving ROAS. It’s also important to make sure you’re getting in front of the right customers. Define your ideal users and get to know them—what they love, how they behave online, and where they search for products. Then, direct your ad spend to them and only them.
2. Hit the right product balance.
You can gain control over your ROAS by shifting the balance from lower ticket items to higher (or vice versa) according to your product assortment. A range of price points can be effective, but supporting high-ticket items can allow you to draw in the customers willing to spend the most. On the other hand, spreading that spend out over lower-ticket items could encourage more spontaneous spenders. Look at ROAS by item price or individual item, optimizing your spend toward the better performing SKUs or price tiers.
3. Offer pre-checkout add-ons.
Just like candies and magazines in the checkout aisles of brick-and-mortar stores, e-commerce businesses can increase checkout value at the end of the online shopping journey. Offer add-ons before checkout, including small upsells or extras, to see a notable boost in ROAS even if only a small percentage of customers take the bait. Better yet, offer add-ons that come recommended by other customers or that are based on the content in the buyer’s cart.
4. Change your online bidding strategy.
If you’re buying ads via Google and Facebook, then you’re playing by the rules of the algorithms behind those platforms. These powerful machine learning models are trained to locate the right purchasers at the right price for your ads, but they might not be optimizing for the right metric. You can fix this by making sure your campaigns are set to optimize toward ROAS and then shifting your bidding strategy until you notice positive changes to that return.
ROAS is easier to track than ever—and you should take advantage. This metric will help make your ad spend more effective. It tells a clear story: If more money is coming in from your ads than it costs to deploy them, you’re heading in the right direction. Use ROAS to optimize your budget and start attracting more of your ideal customers.
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