Everything you need to know about return on ad spend (ROAS)
If you want to get the most out of your advertising budget, then improving your return on ad spend (ROAS) should be a top priority.
It's a common goal for businesses of all sizes, and for good reason. Every dollar you invest in advertising needs to bring a positive return in the form of sales and revenue.
Goes without saying, you need to keep a close eye on your return on ad spend, but that's only a part of the larger picture. Digital ad spending is rising at a steady pace. If you notice that your ROAS is dropping, this could be one of the contributing factors.
In this post, we are going to answer the following questions:
- What is ROAS?
- What is a good ROAS?
- What are some strategies I can take to increase ROAS?
It's important to note that there is no one-size-fits-all approach to advertising, and what works for one brand may not work for another. That's why it's important to continually track the results of any test your brand carries out and to adjust your tactics based on the data you gather.
What is ROAS?
For ecommerce brands, ROAS is one of the most telling success metrics for ad performance. More often than not, ROAS is the main key performance indicator (KPI) and a measure of the efficiency of your brand's advertising strategy.
It dictates whether your ads are profitable or not, and it guides where you should cut off spend and where you should double down. It is a metric that helps businesses measure the effectiveness of their advertising campaigns.
Here's how to calculate an ad campaign’s ROAS: You take your total revenue generated from the ads, and divide it by your total ad spend.
For example, if you spend $500 on Facebook ads and generate $1,500 in revenue, then you have a ROAS of 3, or 3X.
ROAS can help you identify which ad campaigns are working better than others and determine whether you should continue to iterate and invest in those strategies. It also gives you an indication of where future investment should be made to improve results even further.
For example, if your static images are generating a higher ROAS than your video creatives, it would be best to continue testing out different static Facebook creatives.
Seguno’s email users can automatically sync leads from Facebook ads into their Shopify account as subscribers with the Facebook Leads connection.
What is a good ROAS?
This answer is sort of murky, but it’s an important one nonetheless. For some, a ratio of 4:1 is brilliant. For others, it might indicate failure.
For example, startups may need a higher ROAS to cover costs and achieve financial growth. A lower ROAS won’t have as much of an impact on established companies.
Defining a “good” ROAS depends on numerous factors. For instance:
- Your profit margins
- Your industry
- Your average cost per click
- Your cost of goods sold (COGS)
- Your customer acquisition cost (CAC)
A lot of ecommerce companies aim to achieve the magic ratio of 4:1. However, the average ROAS is around 2:1, which means that if you’re making $2 in revenue earned for every $1 spent on ads, you’re probably beating many of your competitors.
5 ways to improve ROAS
1. Creative testing
By now, it is no surprise that the biggest lever in performance for Facebook ads is creative. With detailed interest targeting pretty much obsolete after the release of iOS 14.5, creative is the biggest control we have over what our audience and potential customers see. It's important to constantly be testing new creatives.
If you're looking to squeeze any extra ROAS from your Facebook ad campaigns, the first thing to look at is your creative.
How to creative test
Testing creatives is pretty straightforward. Three creative types that you should have in your ads manager right now are:
- Static images
- User-generated content (UGC) static images and videos
- Professional videos
Among these different creative types, it's important to test different messaging, such as:
- Customer testimonials & reviews
- Showing the results of your products
- Explaining the benefits of your product
Testing different creative types is important for understanding your positioning in the market. What do your customers mostly care about? What problems does your product actually solve?
Throw different creatives into the same ad set (targeting the same audience) to help you understand which audience resonates with which creative.
Don't forget about testing your ad copy, either!
How to measure high-performing creatives
The important metrics within your ads manager that you need to keep an eye on are click-through rate (CTR), hook rate (3-second views/impressions), and hold rate (ThruPlay/impressions).
With these three metrics in mind, you'll be able to understand what creatives are actually working for your brand.
What to do next
Once you have enough data from your various creatives, the most important part of the process is doubling down on the winning creatives, iterating different versions, and creating whole new creatives to test.
Creative testing is never a one-and-done process. Keep your eye on ad fatigue. When you notice that your ads, which were once spearheading your brand's Facebook performance, suffer from high cost per impression (CPMs) or low CTRs, it's time for you to test a new round of creatives.
As you continue to invest in your creatives, you'll undoubtedly see your Facebook ads ROAS increase, and your CPMs and advertising costs decrease.
2. Offer testing
Why should you test your offer?
Your ad offers will incentivize customers who need a final nudge to finally bite the bullet and purchase your product. Changing your promotional pricing strategy is the easiest way to test what works best for your customers, and to understand what motivates them.
New offer tests also come with the benefit of a higher average order value (AOV), depending on the offer that you test. This works hand in hand with increasing your ROAS. Testing a new offer will also help you find new customers from your advertising campaign.
What you should test
There are many different Shopify discounts that your brand can test. Some examples include:
- free shipping over a certain amount
- testing a dollar amount discount versus a percent off ($15 vs. 15%)
- creating a bundle to sell at a discount
The most important caveat with advertising a new offer is making sure that your landing page is consistent with what you promise in your ads. This is particularly true if you notice a high CTR but a low conversion rate (CVR).
3. Landing page optimization
Why the landing lage?
It's quite common that digital marketers focus mostly on what they can control on their Facebook ads manager, rather than taking the whole customer journey into account. An important part of the customer journey is what happens after they click on your ad. Most of our marketing efforts and costs go toward putting an ad in front of the right customer. Let's not waste that customer's attention.
If you notice a big drop-off between the CTR and the CVR, look at your landing page for any signs of mismatched messaging, or for unclear steps.
For example, if your offer states a site-wide discount, your landing page must reflect the discount, or interested customers will drop off. This can help increase your website purchases.
Landing page tests
There are many things you can do with your landing page, including testing completely new designs. These big swings are good to have if you're looking to revamp the customer journey but want to make sure that your page is straightforward to digest for all customers with clear calls to action (CTAs).
Other things to test on your landing page are:
- Your offer
- Your headlines
- Your CTA
- Adding more user testimonials
- Testing down-sells
- Email popup
Most of the work on your landing page will be through an A/B test. You get to see the real effect that a change has on your ROAS, and how it positively (or negatively) affects your ad performance.
4. Broad audiences
What are broad audiences?
Broadening your Facebook targeting is all the rage now in the digital advertising world. Instead of testing every slight variation of detail targeting or lookalike audiences, advertisers are able to achieve better results by letting Facebook decide where to deliver their ads.
A broad audience simply means not including any interests or pixel audiences in your ad sets. Instead, just focus on adjusting location, age range, and gender while leaving everything else blank. Doing this allows Facebook’s algorithm to determine what audience to deliver your ads to, and is usually more effective than determining the audience yourself.
The sad reality is that you can’t expect to achieve the same results with the same targeting used before the iOS update. However, Facebook can still optimize your ads based on who the algorithm notices are performing your desired actions. For example, if Facebook detects that a specific segment of the audience is more likely to convert, they will begin to deliver your ad to more people with similar attributes.
Why you should go broad (and how it can improve ROAS)
Adding a broad audience as an ad set to your campaign can have positive effects on your ROAS, as you don't limit Facebook's algorithm to serve your ads to the wrong audience. Facebook has a wealth of data on every user, and trusting it is a great way to go.
The beauty of going broad on Facebook is that it's cheaper, you rely on Facebook's impressively accurate algorithm to find your perfect customers, and it has higher scaling potential. You won't be exhausting a limited audience as you would with interest targeting.
5. Audience stacks
Let's talk about lookalike stacks.
One way to effectively use Facebook ads to target potential customers is to upload a list of your current customers and create a lookalike audience from that data.
By creating a custom audience, you can tell Facebook what types of individuals tend to buy from your brand and allow the platform to find similar potential customers.
You can stack a 1% lookalike audience of purchasers from the past 90 days and 180 days within the same ad set, and also target your email list. This technique can be particularly useful if you are just setting up your Facebook ads account and already have a list of purchasers from other sources, such as ads on other platforms like TikTok.
Another ad set to test is an interest stack. Long gone are the days when you divide an ad set by single interests, since the data here is largely inaccurate. Giving Facebook an ad set with about five to eight different interests can help push Facebook toward those who are likely to make website purchases, and is still broad enough of an audience to give the algorithm the wiggle room it needs to pinpoint your ideal customers.
Why have audience stacks?
Having audience stacks is a good way to prepare the algorithm to look at specific audiences, rather than your campaign delivering to an irrelevant audience upon its creation. Broad audiences work, but it does need a longer phase for it to learn about your Facebook campaigns.
It is also a plus to have your advantage+ audiences on so that Facebook gives itself permission to go beyond your set audience once it exhausts them.
Increase ROAS with Triple Whale
The unfortunate truth about Facebook advertising is that there is no one-size-fits-all approach that marketers can confidently take to scale their ads and increase their Facebook ROAS.
But testing creatives, offers and landing pages — as well as leveraging broad audiences and audience stacks — can make a huge difference. And when you track and compare performance metrics, you’re on your way to maximizing your advertising efforts.
With Triple Pixel, you can see the real results of your ad spend and true customer journeys, forecast ROAS accurately, and improve financial planning for profitability.
Allen Finn runs marketing at Triple Whale. He started his career in marketing a decade ago, when his advisor suggested that Liquid Swords probably wasn’t appropriate subject matter for academia, and that he should probably get a real job. Since then, he has managed growth, content, and product marketing for startups he founded (RIP) and ones conceived by smarter people. Allen lives in Boston, with his wife, daughter, and two bernedoodles named after tertiary Mad Men characters.
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