Definition: ROAS stands for return on ad spend. It’s a metric used on Google and Facebook Ads that compares the amount spent in an ad campaign with values you set for the conversions you’re tracking.
For example, if you spend $100 on an ad campaign and it generates $1000 in product sales revenue, your ROAS is 10:
1000/100 = 10
ROAS is a useful metric for many businesses because it gives a numerical value for the campaign’s “return”, curbing the need for estimations. But the
Let’s break down how this works and when you should (and can) use it.
ROAS is an automated targeting and bidding strategy, as well as a basic ad metric.
For instance, when ROAS is set up, you can get this type of data on your Facebook campaigns:
This is useful data that directly ties revenue to ad spend. Over time, this business can nail down a ROAS number that
With that data, they can begin to target audiences based on ROAS goals.
ROAS goals will vary depending on the business goal. For example, on Facebook you can target two different optimization events based on ROAS:
- Value optimization: Shows ads to people likely to deliver a high return on ad spend (ROAS). This lets you reach a limited audience on Facebook likely to spend the most.
- Value optimization with Min ROAS bidding: Shows ads to people likely to return at least the minimum return on ad spend you define. This lets you reach people on Facebook who spend an amount that is likely to achieve at least your set ROAS floor.
Which of these types of optimization you choose depends on your business goal and budget. For instance, if you have a lower budget and are looking to maximize conversions, you could use min ROAS bidding.
However, most optimization goals maximize conversion values to get the highest ROAS possible.
Automated Bidding and Targeting
ROAS is a targeting and bidding strategy that is automated by Google/Facebook algorithms. Your goal is to get the system to deliver the maximum return on your ads through a process of bid modification and targeting optimization.
Of course, ROAS itself isn’t new. We’ve always modified bids, optimized content and refined targeting to get the most bang for our advertising buck.
The difference today is that algorithm technology does the modifications automatically. This, of course, can save you from a lot of work, particularly for eCommerce sites with a lot of SKUs. And while it does impact your control, it’s also more precise at hitting your ROAS targets.
Set Revenue-Based Conversion Values
When you create a ROAS targeted campaign, you’ll need to set a value for the conversion you’re tracking.
For eCommerce, this is a website purchase conversion value. Both Google and Facebook let you set this up with transition-specific values so it tracks the actual amount of each purchase. Be sure this is correctly set-up, otherwise your ROAS data will only be an estimate. Here’s how to do it on Google and Facebook.
You can also set up the conversion-event with a static value, which works if you’re selling one item/service at the same price.
Whatever your conversion value, be sure to note that it’s revenue, not profit-levels.
If your ROAS is 1 or higher, it means your reported sales revenue exceeded your ad spend. However, that isn’t a direct profit value.
You’ll still need to calculate your profit margins and discover a target ROAS for profitability. Some businesses need 5x or 10x to turn a profit.
Let the Algorithm Work
There are a number of factors that impact how the algorithm automates your bidding and targeting.
First, know that these algorithms “learn” by capturing data on users. In fact, you must have some baseline conversion data already to start a campaign.
When you start a new campaign, the algorithm goes through a learning phase in which it
When you start these types of campaigns, you need to allow the algorithms to do the work they’re designed for. Obtaining high-value conversions requires data. Like anything that learns, these systems do better when given time.
Keep in mind that the technology is actually targeting users on an individual basis; this is not just broad demographic targeting. Based on the vast data Google and Facebook have on their user base, the algorithms target users with behavior patterns conducive to your target ROAS.
Your numbers may not be high initially, but allow the system to work. Resist the urge to tinker too early.
With ROAS targeting, you want to leverage the algorithm’s power to target individuals based on their buying potential. This level of modification is beyond what a person can feasibly do.
When things get dialed in, ROAS should translate into measurable profit coming from campaigns with repeatable tactics. That’s when ROAS becomes a major source of ROI for your business.