Return of Advertising Spend Analysis: Helping Guide Marketing Budget Spend

Return of Advertising Spend Analysis: Helping Guide Marketing Budget Spend

If you are running digital ads on Twitter, Amazon or Google, you are likely tracking the clicks on your campaign. While clicks are important, cost per click isn't the most valuable metric.

The metric marketers should include in any reporting is Return on Advertising Spend (ROAS). Inspecting campaign ROAS provides deeper campaign insights into digital ad spend and helps raise the quality of marketing budget decisions.

ROAS is an attribution metric that links sales revenue to ad spend. It represents conversion value to advertising cost as a ratio of product revenue divided by the advertising cost for the product (or spend). 

So let's say you have $100 in sales for an ad group and you spent $25 in digital advertising. Your ROAS is $4 per every dollar of campaign spent.    

The objective with Return on Ad Spend is to have as high a ROAS value as possible. A high ROAS shows the conversion value is worth the advertising cost because the revenue exceeds the cost as the campaign moves forward.

ROAS is associated with social media advertising, so you will likely see the metric in the ad manager for any given platform. However, each platform has a slightly different take on the metric, thought the basic purpose for the ratio — revenue/ad budget spent — is the same. Facebook, for example, has a website purchase ROAS, which takes conversion value at the user's website divided by total amount spent in Facebook ads.

Another example treats ROAS as a benchmark. Google offers a Target ROAS for Google Ads, which permit marketers create a smart bidding strategy meant to gain more conversion value or revenue at a target ROAS. Using Target ROAS, however, has a few key prerequisites. One requirement is a set conversion values and 20 conversions in a 45-day minimum. Marketers should also plan a budget buffer, about twice the daily budget for ROAS, to cover any fluctuation in daily spend.

Choosing ROAS is important to a campaign analysis because it treats marketing as an investment, rather than an expense, as cost per activity (CPA) metrics do. A cost per click reminds the marketing team that they are spending on every click, but does not remind the team to ask another important financial question: How much revenue-generating activity is linked to that expense?

ROAS answers that question, giving a better value comparison within each ad group. It is possible to have high conversion and yet a low ROAS. The cost per conversion of two campaigns can be the same, say $10 per click. But if each campaign is for two different products, each with a different revenue, then the ROAS for one will be greater, indicating a campaign with greater value. So examining ROAS with a CPA metric reveals a broader financial picture to guide which campaigns to further invest in. 

To create a ROAS calculation of your own, you can export the campaign data from each ad manager into a CSV file and then import the sheets into an Excel spreadsheet or Google sheet. You can then create a dedicated sheet that links to the fields from those tabs and calculates the ROAS formula.

A campaign review can now quickly uncover better insights into how far marketing spend is going to attract your desired audience. Campaigns that appear expensive may turn out to more than pay for themselves if the products in question are high margin and the ROAS is high. 

In the screenshot example above, we see the total ad spend, total sales and ROAS of four different campaigns. The sales on Campaign D are the lowest of the four campaigns, yet its ROAS is similar to that of Campaign A, which has the highest sales among the campaigns. If each campaign is promoting the same product or service, you can make an argument with a manager looking to cut budget that the return on the high-spend campaign is as effective as the one that produced the least sales. In this case, cutting campaigns B and C would make the most sense, as their combined ad spend is higher than A and D combined, yet both have a lower ROAS.

ROAS analysis is a strong starting point for deeper conversations about which campaigns to refine, which campaigns to invest further in and which campaigns to retire. 

The explosive growth in social commerce, fueled by the at-home restrictions from the COVID-19 pandemic, will certainly open up more questions around which social media campaigns are shaping sales. EMarketer anticipates US retail social commerce sales to rise to $36.09 billion this year, a 34.8% increase. It also updated its forecasted growth rate from 19% to 37% because of an expected spike in sales.

Marketers relying on social media commerce start watching Return on Ad Spend metrics to make the most of their limited social media marketing budgets. 

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