Return on Ad Spend, An Unsung Metric
November 7, 2011
Return on ad spend (ROAS) is one of the easiest revenue based metrics to measure. It is simply the total revenue generated for a specific marketing channel (like PPC) divided by the total spend on that vertical.
Here’s the formula: (Revenue/Spend) = Return on Ad Spend
Pretty simple, but here’s an example for further clarification:
If I spent $10,000 on paid search in October, and generated $40,000 in revenue, my ROAS for paid search is $4:1. ($40,000/$10,000= $4)
What does ROAS tell you?
It tells you if, at the most foundational level, a marketing channel is performing at a level that will allow for profitability.
Unlike many PPC metrics, the higher your number the better. That’s because the metric tells you how much revenue you generate off each advertising dollar spent. So a $4:1 means that for every $1, you generate $4 in revenue. A $6:1 means that you generate $6 for every dollar you spend.
What Should Your Return on Ad Spend Goal Be?
For some businesses a $4:1 is outstanding. Others will need $10:1 to remain profitable. The difference is mostly based on the profit margins of the product or service you are selling. At a basic level, big margins mean that you can afford a low ROAS and small margins mean you need advertising costs to be low (on a percentage basis) so your goal will be a higher return on ad spend.
Why Your Should Use this Metric More
When you combine ROAS with CPL/CPA goals it paints a more holistic picture of a marketing channels performance. That is because it helps takes into account traffic and lead quality. For example, if you have a low CPL and a low ROAS, you know you aren’t creating quality leads. Conversely, a high CPL but low high ROAS means that you aren’t wasting time with unqualified leads and perhaps CPL goal can be raised.
What unsung metrics do you use to measure your PPC accounts performance?
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