Return on ad spend (ROAS) is an extremely important metric for eCommerce owners utilizing any type of online advertising. It measures the amount of revenue earned for every dollar spent on advertising and equals your total conversion value divided by your advertising costs. Conversion value is the amount of revenue earned from a conversion. If you spend $50 on a Google ad for your business and earn $150 in revenue, your ROAS would be 3. This means that for every dollar you spend on advertising, you earn $3 back.
After working with many eCommerce clients and as an eCom owner myself, ROAS is a part of my daily vocabulary. When I’m measuring the success of my own advertising campaigns, I pay very close attention to the ROAS of campaigns, however, it’s not the end all be all when I’m making decisions.
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Table of Contents
- 1 Why ROAS is Important
- 2 What to Expect with ROAS
- 3 Tips for Improving ROAS
- 4 Other Ways to Generate Revenue
- 5 In Closing
Why ROAS is Important
When determining the success of your ad campaigns, ROAS is a great metric to pay attention to in order to help you make decisions about your advertising budget. You may see one channel performing better than another based on your ROAS and decide to invest more money there, while pulling back elsewhere. Seeing a really great ROAS will also show you where you can double down and invest more.
Learn More: Investing in Google vs. Facebook Ads
For DermWarehouse, we’ve seen a much better return on ad spend on Google and Bing than on social media and because of this, we invest a lot more money in those channels. We also pay close attention to each campaign we’re running within Google and Bing. If we see that our ROAS is doing well, we try to double down and invest more money. If we see that the ROAS is struggling, we may pull back on a particular brand or campaign until we can optimize it to be more profitable. While ROAS isn’t the only metric you should be paying attention to, it is an important one to help you gauge the success of your campaigns.
What to Expect with ROAS
A lot of eCommerce store owners have unrealistic expectations for their return on ad spend. Businesses think they should get a 7:1 or 8:1 ROAS, meaning that for every dollar they spend, they expect to make $7 or $8. While in theory this sounds great, oftentimes, it isn’t realistic.
It’s important to be profitable but you want to keep repeat customers in mind too. Most people overlook how repeat purchasers will lead to a more profitable eCommerce operation. For DermWarehouse, we have a very high repeat purchase rate, so for us, while ROAS is very important, we take it with a grain of salt.
On average our ROAS is about 2.5 to 1, meaning for every $1 we spend, we make $2.5. Considering our margins are about 50% on average, this ROAS doesn’t seem great. While we’d love to improve it, based on the competitiveness of our industry, this has always been our average. Does this mean we shut down all of our ads? Absolutely not. It’s extremely important that we’re always bringing new customers to our site because even if we don’t convert them from the original ad, there’s a good chance we may convert them later. Not only that, we’re able to keep our customers around and their lifetime value is high, meaning that the ROAS isn’t the only factor that goes into our overall profitability.
Of course, we’re always looking to improve our ROAS, and I’ll get into some tips on how to do that below, but I always try to think more long term than just how much we’re spending on an ad campaign each month vs. what our revenue is for that particular campaign. It’s important to not be shortsighted here and think about what value your customers can bring over their whole lifetime. Sure, they’re spending $100 now, but that $100 could turn into $1000 in a year from now, or maybe even more!
I’m also able to look at the ad spend for each brand we sell and compare that to our revenue for each brand from our website. Even though our ROAS may not be as profitable as we’d like it to be, each brand is. For example, in any given month, we may spend $2,000 running ads on our brand SkinMedica. Our ROAS may be around $4,500 (or sometimes even less on this particular brand). The revenue on our website for SkinMedica, however, in any given month, could be upwards of $10-15,000. So, while our ROAS is only a 2.5 to 1, our return overall is over a 5 to 1. How does this happen? Not only are we converting new customers from our ads, we’re also bringing back repeat customers at all times!
It’s really important that when you’re looking at your ROAS, you’re thinking long-term and taking average lifetime value and repeat purchase rate into consideration. Being short sighted can cost you many potential long-term customers over time.
Tips for Improving ROAS
Target long-tail keywords
Whenever we set up Google or Bing ad campaigns, we always try to target longer-tailed keywords. This means our keywords are much more specific and drive traffic that is more relevant. For example, instead of targeting the brand “SkinMedica” we will try to target more specific products like “SkinMedica TNS Eye Repair.”
The higher in the shopping funnel you can reach customers, the better. Whereas someone searching for SkinMedica in general may researching that brand, it’s more likely that someone searching for the SkinMedica TNS Eye Repair has narrowed down their search and knows exactly what product they want to purchase.
How does this help improve your ROAS? The more specific you get in your search terms, the better chance you have of potential customers converting. So, for every dollar you’re spending, you should get higher quality prospects to your site, hopefully equating to more revenue and therefore a higher ROAS.
Utilize negative keywords
Just as it’s important to choose great search keywords, it’s also extremely important to pay attention to negative keywords. When you’re looking through your search terms in Google ads, pay attention to anything that’s not relevant to what you’re selling and set it as a negative keyword.
My favorite example of this is with a brand that we sell called Elon. They sell hair care products, including supplements to help with hair growth. As I was browsing through our search terms, I realized we’d gotten over 100 clicks for the phrase “Elon Musk Smart Pills.” Still to this day, I’m not exactly sure of what those are, but our products were showing up for that search query due to the words “Elon” and “Pills.”
I was able to set this phrase as a negative keyword so that our ads would never show up when someone was searching for that. I also made sure to set “Elon Musk” as a negative keywords as well, just in case. If you’re not spending money on irrelevant terms, your ROAS is bound to improve!
In addition to setting negative keywords for each individual campaign, you can also set account-wide negative keywords. This gives you the ability to make one big list that you apply to all campaigns and really removes some of the work. Some of the account-wide negative keywords we’ve set are Botox, Lasers, and Bandaid, as these are search terms that have come up a lot through our campaigns but are not relevant to any of the products we sell.
Learn More: How to Add Negative Keywords in Google Ads
Pause poor performers
Sometimes you just have to know when to pull the plug on certain products. This is something that’s always been very difficult for me because of how well I know our products and what we sell. I see a product that’s gotten 100 clicks and no conversions and I think to myself about all the potential sales we could be missing out on if we pause that specific product or keyword.
I’ve learned that you just have to trust the data. My rule of thumb is that if a product of keyword has gotten over 50 clicks with 0 conversions, I will pause it. By limiting the amount of money you spend promoting products that aren’t converting well, you will be putting more of your budget behind the ones that do. This will, in turn, help to improve your ROAS.
Other Ways to Generate Revenue
I mentioned earlier that while ROAS is extremely important, it’s not the end all be all when it comes to making decisions. When you’re running any type of ad, you’re paying to get visitors to your site, so you should be doing whatever you can to convert those visitors into customers, whether from your initial ad or through another method. While utilizing all of the methods below won’t directly contribute to your ROAS, it will help with customer conversion, therefore benefitting your bottom line.
In addition to your regular ads that you set up to drive new traffic to you site, you also want to make sure that you have retargeting ads set up. These ads will show to customers who have already been on your site and remind them that they should come back and shop with you!
People may bounce from your website for a variety of reasons, but if they’ve clicked on your ads once, chances are they’re interested in buying whatever it is you’re selling. This means that once they’ve been on your site before, they have a good chance of coming back and pulling the trigger! To ensure you’re making the most out of your ads, make sure you have retargeting ads set up too.
Email collection form on-site
Having a place to collect visitor’s emails as they land on your site is essential! Whether you’re offering some kind of purchase discount or a chance to sign up to receive special offers, you want to make sure you have a way of getting as many email addresses as possible (the on-site discounts tend to work best in my experience).
Once again, you’ve already paid for these visitors to land to your site. There’s a small chance they may convert right off the bat, but odds are they won’t convert on that first visit. Collecting their email address gives you the opportunity to market to them to try to get them to convert down the road.
We offer a 20% discount to new customers on participating brands on our site. In the last month alone, we collected over 6,000 new emails, giving us the chance to market to so many new customers.
Having a great email marketing strategy in place is going to be the best way to use all of those email addresses you’ve collected to convert site visitors into customers. In addition to sending out campaigns each month, it’s a great idea to think about a strategy for browse abandonment and shopping cart abandonment to capture as many visitors as possible.
Learn More: eCommerce Email Marketing Statistics
Customer Service & Live Chat
Having a great customer service strategy in place is crucial for generating additional revenue. You want to make sure that if site visitors have any issues getting through the order process or questions about products, you have someone available to answer them. I can’t tell you how many people have made a purchase with us just because we answered the phone and were able to answer their questions after another company couldn’t.
Learn More: How to Improve eCommerce Customer Service
Live chat is also a great way to answer customer questions quickly. Many people don’t like picking up the phone and calling a company. Being able to provide a quick and easy answer can be the difference between someone placing an order or looking elsewhere. When we launched live chat on our site, we saw a 10% increase in conversions.
With live chat, just make sure you have someone running it that’s very knowledgeable about your process and products. If you don’t have someone on your staff that can dedicate the time to this or has the necessary knowledge, it could actually end up doing more harm than good.
Both product and company reviews are extremely important and could help increase your conversion rate on your site. “93% of consumers say that online reviews influenced their purchase decisions” [source]. Not only do customers want to see reviews of the products their considering, they also want to see reviews of your company so they can feel good about placing an order with you!
Not only will having reviews on your site be beneficial to your conversion rate, if you work with a Google-certified reviews providers, you can get your reviews to show up in your Google ads as well.
- ROAS measures the amount of revenue earned for every dollar spent on advertising and is a great metric to look at when determining success of your ad campaigns.
- While ROAS is very important, it shouldn’t be the end all be all metric that you consider. Make sure you’re thinking long term about lifetime customer value and repeat customers when you’re deciding on ad spend and budget.
- Many business owners have unrealistic expectations when it comes to ROAS. Again, you need to think long term and take other variables into account when determining your profitability.
- There are ways to improve your ROAS, such as targeting long-tail keywords, utilizing negative keywords, and pausing poor performers.
- Think about other ways to generate revenue from your site. Even though this may not contribute to the ROAS directly, it will help with your bottom line!