Understanding Roi – How To Know If Your Ads Are Successful
ROI (Return on Investment) and ROAS (Return on Ad Spend) are two key metrics that will help you understand how well your ads are performing and determine their success.
ROAS and ROI Meaning
ROI Formula:
ROI = (Net Profit / Cost of Investment) x 100
ROI helps you understand the overall profitability of your campaign by taking into account both the revenue generated and the costs incurred overall.
ROAS Formula:
ROAS = (Revenue from Ads / Cost of Ads)
This formula focuses on the direct relationship between ad spend and revenue, providing a clear picture of the effectiveness of your ad spend.
While it’s important to know both your ROI and ROAS, in this article we’ll be focussing more on ROAS, as it directly relates to the efficiency of your ad campaign.
Importance of High ROAS
Profitability is key in any market, but especially in paid advertising; you don’t want to spend more on ads than you’re making off them. A high ROAS means a healthy profit margin, where you’re making more money from each sale after covering your advertising costs.
If your ad costs outweigh the revenue coming in, this means that your ROAS is negative and calls for immediate action.
To make sure your campaigns stay profitable, it’s important to regularly review your metrics. This will help identify areas where ad spend might be wasted. If you notice a low or negative ROAS, here are some strategies to improve your ads and optimize your ad spend.
Strategies for Maximizing Paid Advertisement Profitability
Profitability is key in any market, but especially in paid advertising; you don’t want to spend more on ads than you’re making off them. A high ROAS means a healthy profit margin, where you’re making more money from each sale after covering your advertising costs.
If your ad costs outweigh the revenue coming in, this means that your ROAS is negative and calls for immediate action.
To make sure your campaigns stay profitable, it’s important to regularly review your metrics. This will help identify areas where ad spend might be wasted. If you notice a low or negative ROAS, here are some strategies to improve your ads and optimize your ad spend.
Precise Targeting:
- Focus your ad spend on high-value audiences that are most likely to convert. This includes segmenting by income levels, geographic locations, and user behavior.
- Spend more where you make more. Do your best to eliminate spending in target areas that are less likely to drive sales.
- Leverage negative locations to reduce the likelihood of spending money outside of your target area.
- Implement positive bid adjustments for high-value segments so that your ads are shown to potential buyers who are more likely to make a purchase.
Cost Management:
- Monitor your cost per lead and adjust your campaigns to make sure that you are not overspending on getting new leads.
- Find out what the industry CPL (cost per lead) benchmarks are for your business and work from there. We generally aim 30% lower than what the national average is. You always want to aim for higher performance to have a better ROI margin.
- Regularly review and optimize your bids to balance your cost and revenue generation.
Campaign Segmentation:
- For your campaigns and keywords, avoid lumping too many products/service/vehicle types into a single campaign. This will help you control the budget at each service or product category level.
Example: If you are a Ford dealership, you should create separate campaigns for cars, SUVs, trucks, and even break out top sellers like the F-150 into its own campaign. If you make the mistake of bundling all your KWs into a few campaigns, you will not be able to adjust spend strategically.
Continuous Optimization:
- Regularly analyze your campaign performance and make data-driven adjustments. This includes A/B testing ad copy, adjusting bids, and refining targeting strategies.
Tracking Tools:
- Use tools like Google Analytics and Google Tag Manager to track conversions and measure the effectiveness of your campaigns. Heap and Hotjar are great tools for tracking user data. Both offer free plans so you can try them out.
Understanding ROAS and focusing on profitability will help you make sure that your paid search campaigns are not only effective, but sustainable and profitable for the long run. By implementing these strategies, you’ll maximize your ad spend, drive better results, and see higher returns on your advertising investments.
While these tips will improve your ads performance, if you’re unfamiliar with advertising platforms or don’t know how to read and measure the various analytics, it can be overwhelming. Working with a paid media agency is a sure way to maximize your ROAS, as it takes the guesswork out of the equation and saves you time to focus on other aspects of your business.
Contact us for a free audit and expert feedback on optimizing your current campaigns, or book a free discovery call to learn more about how working with Premier Online Marketing can boost your sales and reach your targets.
