Here’s the truth about your PPC ads.

It doesn’t matter what your ROI, conversion value, or cost per click is. You won’t know if you’re making a profit until you calculate your return on ad spend (ROAS).

If you’re thinking, “ROAS, what’s that?” Let me help you out!

In this post, I’ll teach you what ROAS is, how to calculate it, and what to do if it’s low. You’ll leave this guide knowing the next steps to optimize your ad campaign and make more revenue.

Let’s get started!

Table of contents

• What is ROAS?
• Why is ROAS important?
• How do you calculate your ROAS?
• Thoughts on ROAS calculators
• What is a good ROAS?
• How to improve ROAS
• ROAS vs. other strategies

What is ROAS?

ROAS, or return on ad spend, is a marketing metric that measures your revenue generated for each dollar spent on paid ads.

If you’re thinking, “Uh, come again?” You’re not the only one! Return on ad spend sounds complicated when it’s explained like above. So I’ll break it down for you.

Your ROAS tells you how much profit you’re making from PPC ads. By calculating your ROAS, you’ll know if you’re making more than what you put in.

We’ll use a fake scenario to explain ROAS.

Let’s say Joe owns a retail store in Buffalo, New York. His goal is to attract more local buyers, so he ran a PPC advertising campaign.

After some calculations, he found his ROAS to be 3:1. A 3:1 ratio means Joe is making three dollars for every dollar he spends on his advertising campaign. So far, his ads are paying off! He’s bringing in more local customers AND is making a profit from his ads.

ROAS vs. ROI

Before we continue talking about ROAS, I want to make sure you know the difference between return on ad spend and return on investment (ROI).

You might be thinking, “If ROAS calculates how much profit you get from running an ad, isn’t that the same as ROI?”

Not exactly. Your ROI measures your overall marketing spend, which includes:

All marketing campaigns

Employees or contractors who work on your marketing campaign

Overhead costs

Your ROAS, on the other hand, measures PPC ad campaigns, including ad groups and keywords.

To find out how ROAS differs from cost per click and cost per action, head over to the bottom of this post.

So you know what return on ad spend is and what it measures, but why is it important?

Why is ROAS important?

ROAS is important because it tells you the quality of your clicks and ad campaigns rather than the quality. By calculating your ROAS, you’ll know if your ads reach the right audience and convert. It’s handy for eCommerce businesses, as your main goal is to make sales.

I’ll go over an example.

Let’s say your business sells handmade baby blankets. You want to compete against local companies, so you run a Google Shopping marketing campaign.

A week passes by, and you calculate your conversion rate and ROAS. Hmm, that’s weird—it looks like you have a high conversion rate and low ROAS. People are buying your products, but it’s not enough to make a profit.

What does this mean?

Maybe your products cost less than they should. Or, perhaps your ad campaign isn’t targeting the right audience.

All in all, when you calculate ROAS, it only tells you if you’re making money. It’s up to YOU and your conversion rates to figure out why.

Achieving a high ROAS means:

Targeting the right audience – Are you advertising to people who are ready to buy now? Are you using both keywords and negative keywords?

Investing in convert-worthy ads – Is your ad copy selling the right customer? Do your images show off your product?

Making more than you spend – Are you cashing in more than you spend on advertising costs?

Now you’re probably thinking, “So how do I calculate my ROAS?” Which we’ll talk about right about… now.

How do you calculate your ROAS? (Two simple ways)

A simple way to calculate ROAS is with the formula:

(Revenue – cost) / cost

Let’s go over each part of the equation, starting with total revenue. Your total revenue is how much money you made from your ads.

You can find your revenue by tracking your purchases.

Then there’s the cost, which is how much you spent on your campaign. Some of these expenses include:

In-house ad costs – Are you paying someone on your team to run ads?

Partner ad costs – Is an agency, like us, running your ads?

Other fees – Software, transactions, affiliate, etc.

Want to know a secret?

The ROAS formula above is a standard way to calculate your ROAS, but I found an even BETTER way to do it.

When I calculate ROAS, I make sure the cost per conversion is less than 30% of the average order value.

I’ll know the ROAS is optimal if the CPC is less than the average order value.

Below is an example of one of my clients.

After one year of running ads, my client spent £46,958.28 on ads and earned £354,614.98 in sales.

From here, I collect the cost per action, which on average is £6.78 for my client. Then, I calculate the average order value by dividing the conversion value by the number of conversions.

• Cost per conversion (CPC) = £6.78
• Average order value: Conversion value / Number of conversions = £51

So, it looks like the cost per conversion (£6.78) is less than 30% of the average order value (£51). This means my client is making more than they spend!

To recap: As long as your cost per conversion is 30% less than your average order value, you will have an optimal ROAS.

Overall, my client’s ROAS is 7.55, which means they’re making £7.55 for every euro spent!

Thoughts on ROAS calculators

If you looked through the calculations above and thought, “I don’t know… using a ROAS formula is complicated,” then you can always find a ROAS calculator to find your return on ad spend.

You’ll find a few options by searching “ROAS Calculators” on Google.

If you calculate a low ROAS, remember that it’s up to you or your PPC ad agency to figure out why it’s low and how to fix it.

What is a good ROAS?

Back in 2016, Nielsen found 278% as the average ROAS across all industries. 278% means you’d make $2.78 per $1 spent.

source

Nielson’s research was the best study I could find on what the average ROAS is. And it’s already five years old! A lack of research tells me this:

There’s no target ROAS for all businesses.

A target ROAS can range anywhere from 2:1 to 10:1. This number mainly depends on:

1. The size of your business – Are you a local shop or an international company?

2. Your industry – Who are your competitors?

3. Average cost per click – How much are you bidding for keywords?

I work with small businesses and have found that a 4:1 ROAS is a quality score. In other words, if they’re making $4 per $1 ad spend, my clients are doing phenomenal. BigCommerce also agrees, but remember—your business might be different!

To find out what a good ROAS is for your business, you can contact us for a free PPC ad audit.

How to improve ROAS

So you calculated your ROAS and—womp-womp—it’s lower than expected. Now you have to figure out why you’re not making enough money.

If you don’t work with a PPC ads specialist, I suggest going through the checklist below for trial and error.

1. Check your cost per action

As I talked about earlier, I found that my clients achieve a quality score if their cost per conversion is 30% less than the average order value.

If you don’t remember how to find the average order value, head back to calculating your ROAS and figure out if your CPC is 30% less than your average value order.

Most likely, if your ROAS is already low, then your CPC will be higher than 30%. If this is the case, I suggest:

• Making sure you’re paying for optimized keywords and implementing negative keywords.
• Reevaluating your products and pricing strategy (average order value)

2. Reduce the cost of your ads

It’s easy to pour money into digital advertising. If you outsource your PPC ads, figure out how much time they spend creating the ads. Are they efficient? Or is it time to cut down the time?

You should also look at ad features, like your:

Attribution model – If you run marketing strategies outside of PPC, do you know which one generates the most traffic?

Advertising campaign – Are you targeting optimal goals, budget, and location?

Location – Are you running ads on platforms your audience goes to? For example, you might be running Facebook ads and Google ads, but which one brings more traffic?

Ad groups – Is your ad group targeting the right keywords?

Keywords – Bid on non-competitive ad group keywords, and make sure your audience uses them. You can check out Rand Fishkin’s data on keyword length.

Ad copy – Is your ad copy compelling? Does it sell your product well?

Audience – Are you targeting users who care about your product? Are they only clicking on your ad? Or are they taking action?

3. Increase your revenue

Once you’ve optimized your ad costs, take a look at your revenue.

Are you targeting customers who are ready to buy? If not, you may need to retarget your ads elsewhere.

And take a look at your other digital advertising strategies.

Do you have landing pages for your products?

Is your website copy optimized for sales?

Do you have content for each part of the sales funnel?

And who knows, maybe you’re not giving yourself credit and are pricing your products too low. If this is the case, build a survey and ask your audience how much they’d pay for certain items and why. You might be surprised at what you find!

4. Test ROAS again

Calculating your ROAS isn’t a one-and-done deal. Continue testing your ads and ROAS throughout your campaign. You can use a ROAS calculator or one of the methods I mentioned above.

And use this checklist to keep your PPC ads strategy optimized. Or, if you use Facebook, check out my post, How to set up a Facebook ad campaign.

As you can see, there are many reasons why your ROAS is lower than usual. You’ll need to go through each step carefully, but the results are worth the effort.

ROAS vs. other strategies

I’ve noticed many of you asking if you should use ROAS instead of cost per click and cost per action. Let’s go through both strategies and how they work with ROAS.

ROAS vs. Click-through rate

You shouldn’t compare your ROAS and click-through rate (CTR) because they measure two different things.

Click-through rate measures how many clicks you get from a paid ad. If your CTR is 90%, that doesn’t tell you how many of those clicks turned into sales (conversion rate) and how much money you profit from those sales (ROAS).

Your CTR tells you if your ads appear in front of the right people. But you’ll need ROAS to determine if you’re making a profit.

ROAS vs. Cost per action

A cost per action means you pay every time a user takes action with your business. Some actions might be:

• Visiting your site
• Signing up for a free trial
• Buying a product

So how does CPA differ from ROAS?

Let’s say you’re running three different PPC ad campaigns on Facebook, Google, and Instagram.

According to your calculations, Google’s CPA is the lowest out of all three. So you’re spending the least amount of money to run Google ads. You might be thinking, “I should run Google ads more because it’s the cheapest AND I’m getting more conversions!”

That sounds great in theory, but let’s take a look at your ROAS.

It looks like your ROAS is higher for Instagram ads than your Google Ads! Even though your CPA is lower with Google, your Instagram ads get more quality leads and profit.

I prefer using cost per action and ROAS as a team. The cost per action tells you how much you spend on individual ads, and your ROAS tells you if it’s sustainable.

Your next steps

I bet you’re excited to calculate your ROAS and find ways to make more revenue! Below are three essential points to take away from this post.

1. Calculating your ROAS – I went over two ways to calculate your ROAS. I recommend calculating your average order value (AOV) and cost per action (CPC) and then seeing if your CPC is 30% less than the AOV.

But, you can also use the equation: Revenue – cost/cost.

Or, try an online ROAS calculator.

2. Understanding your ROAS – Return on ad spend only tells you if you’re making enough profit from your PPC ads. If your ROAS is low, it’s up to you to dig deeper and determine why. You can use other data, like your CPC or CPA, to get a complete picture.

Understanding why your ROAS isn’t optimal is a long-term strategy, so you can always reach out to us and schedule a free PPC ads audit.

3. Improving your ROAS – Be prepared to go through trial and error when improving your ROAS. Optimize your PPC ads and products to make sure you’re making the most of your strategy. Then, test until you get it right!

So what do you do from here? One, feel free to contact me with any questions you have about PPC ads.

And go ahead and check out the rest of our blog, as well as our in-depth guide on Google Ads. Learn as much as you can about your PPC strategy, and your ROAS will become optimal in no time!