ROAS, or return on ad spend, is a metric that measures how much revenue you generate for every dollar you spend on advertising. It is calculated by dividing the total conversion value (the amount of revenue your business earns from your conversions) by the cost spent on advertising. For example, if you spend $1,000 on a paid search campaign and earn $5,000 in revenue from that campaign, your ROAS is 500% or 5.0.
ROAS is a useful metric to evaluate the effectiveness and profitability of your paid search campaigns. It helps you to optimize your budget allocation, bid strategy, and keyword selection. However, ROAS is not the only metric you should care about. There are other factors that can affect your overall business performance, such as customer lifetime value, profit margin, and brand awareness.
So what happens when you push for a higher ROAS in paid search advertising? Is it always a good idea to aim for the highest possible return on ad spend? Let’s look at some of the pros and cons of pursuing a higher ROAS.
Pros of Pushing for a Higher ROAS
- A higher ROAS means that you are generating more revenue for every dollar you spend on advertising. This can improve your cash flow and profitability, especially if you have a high-profit margin on your products or services.
- A higher return on ad spend can also indicate that you are reaching the right audience with the right message at the right time. This can enhance your customer satisfaction and loyalty, as well as increase your chances of repeat purchases and referrals.
- A higher ROAS can also help you to gain a competitive edge over your rivals. If you can achieve a higher return on ad spend than your competitors, it means that you are either spending less or earning more than them. This can give you an advantage in terms of market share and brand recognition.
Cons of Pushing for a Higher ROAS
- A higher ROAS does not necessarily mean that you are maximizing your overall profit. Sometimes, pursuing a higher return on ad spend can lead to missed opportunities or lower returns in the long run. For example, if you focus too much on high-ROAS keywords or campaigns, you may neglect new potential customers or markets that have lower ROAS but higher lifetime value or growth potential.
- A higher return on ad spend can also come at the expense of other important metrics, such as click-through rate, conversion rate, or cost per acquisition. For example, if you try to achieve a higher ROAS, you may end up paying more for each click or conversion than you can afford. This can lower your profit margin and reduce your scalability.
- A higher ROAS can also be influenced by external factors that are beyond your control, such as seasonality, demand fluctuations, or competitor actions. For example, if your ROAS suddenly spikes during a holiday season or a special promotion, it may not reflect your true performance or sustainability. Similarly, if your competitors lower their prices or launch a new product, it may affect your ROAS negatively.
How to Find the Right ROAS for Your Business
So pushing for a higher ROAS in paid search advertising has its benefits and drawbacks. The optimal ROAS for your business depends on your goals, budget, industry, and market conditions. There is no one-size-fits-all answer to what is the best return on ad spend for your business.
However, there are some steps you can take to find the optimal ROAS for your business:
- Define your business objectives and key performance indicators (KPIs). What are you trying to achieve with your paid search advertising? How do you measure success? How does ROAS fit into your overall marketing strategy?
- Analyze your historical data and benchmark against industry standards. What is your current ROAS, and how does it compare to your competitors and peers? What are the trends and patterns in your data? What are the factors that affect your ROAS positively or negatively?
- Experiment with different scenarios and strategies. What would happen if you increase or decrease your ad spend, bids, keywords, or targeting? How would that affect your ROAS and other metrics? What are the trade-offs and risks involved? This one is my favorite. I’ve had clients convinced they need to achieve a certain high ROAS goal, but once we achieve it, they are not happy with the volume of orders they are getting.
- Monitor and optimize your campaigns regularly. How is your ROAS changing over time and across different channels, devices, locations, or segments? What are the best practices and tips to improve your ROAS? How can you leverage tools and techniques to optimize your campaigns regularly? How does your ROAS change over time and across different channels, devices, locations, or segments?
In summary, ROAS is a key metric for performance marketers who want to measure and optimize their paid search advertising campaigns. However, it is not the only metric that matters. You also need to consider other factors that affect your overall business performance, such as customer lifetime value, profit margin, brand awareness, and more.
To find the optimal ROAS for your business, you need to define your goals, choose your metrics, use the right tools, and experiment with different scenarios and strategies. By doing so, you can work on finding the right ROAS and achieve better results for your business.