What is a good ROAS? Tips for improving and unleashing your ad spend potential

ROAS (return on ad spend) measures of how effective your ads are by calculating how much you’re spending on ads versus how much revenue those efforts generate. Typically, effective ads generate higher revenue.

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But what is a good ROAS? If you spend $500 and make $1,000, is that a good return on your advertising investment? As with general return on investment questions in marketing and advertising, the answer isn’t super simple, as it involves a lot of “it depends” factors.

Keep reading below to learn how low-cost digital advertising should be for your organization and discover more about what a good ROAS is and how to improve yours.

What ROAS is considered good?

One common benchmark for ROAS is a 4:1 ratio. In this ratio, every dollar you spend on ads generates $4 in revenue. To put it another way, you get a return of 400 percent on ad investment.

No one-size-fits-all answer

You can probably already guess that such easy answers aren’t super effective in marketing and business. There are too many variables at play and too many differences in various business models. Instead, you should look at how much ROAS is good for a business of a certain type or size. You might, for example, explore ROAS benchmarking by industry.

Examples of different ROAS scenarios

For example, businesses with low margins, such as many clothing retailers, restaurants, and grocery stores, have to keep marketing and advertising budgets tight. In many cases, they need an especially high ROAS, such as 10:1, to support profitability.

On the other hand, a startup SaaS business may need to invest a lot of money into advertising to gain traction in competitive markets. Early on, it may spend so much on advertising that the ratio is negative—perhaps for every $5 a startup spends, it generates $2 in revenue. The goal in this situation is to play a long game that eventually leads to a much higher ratio, often through eventual viral growth.

Average cost per conversion by sector

To better understand how differently ad costs can work in various sectors, consider the average cost per conversions for Google Ads in various niches below.

 

Auto $2.46
E-commerce $1.16
Educate $2.40
Finance and insurance $3.44
Legal $6.75
Technology $3.80

 

As an agency, you must understand the nature and goals of a client business as well as the overall industry it’s in to know what ROAS is good. That’s true whether you do everything in-house, offer ad services through a PPC reseller program, or white label Google Ads management.

Factors that affect ROAS

It’s easy to see that average ROAS isn’t the same for all types of businesses. Tesla won’t have the same ROAS as Nike, and a small business shouldn’t benchmark its ROAS against figures from large corporations.

One of the best ways to understand what ROAS should be for your clients is to know what factors affect this metric. For example, if you’re already pumping a lot of time and effort into local SEO, local search engine marketing efforts might take off with minimum ad spend. But without the support of strong SEO, you may have a poorer ROAS because you have to spend more on SEM to drive the same traffic, brand awareness, and conversions.

While many things can impact ROAS, some major factors are discussed below.

The client’s industry

As already demonstrated above, industry and the current state of the markets play a big role in what a good ROAS is. When you’re working in a highly competitive market, for example, you may have to spend more on ads to connect with the consumer or ensure this brand or company is the one people remember.

When you’re analyzing ROAS or discussing it with your client, it’s important to always do so in the context of the relevant industry. Don’t show a client expected ROAS for e-commerce as an example of what you can provide for a legal business, for example. This sets them up for disappointment and your agency up for failure when you can meet those expectations.

Maturity of the brand

Remember the example of a startup SaaS business above? If the company is just stepping into a market, it has a lot of work to do in building brand recognition, creating a following, and investing in a loyal customer base. This work usually means, among other things, spending more on ads without expecting an immediate return.

This is true for all new businesses and brands. When working with clients in this situation, educate them about the need to invest in growth. They likely can’t sit at the average ROAS for their industry and experience that growth.

Maturity of the industry

The same is true for overall industries. If a market or sector is new or disruptive, businesses that invest in it must do the work to build communities of customers. Sometimes, that involves overcoming ignorance of the sector, fear of new things, or general apathy toward things customers aren’t already comfortable with.

The impact on ROAS is a factor even when mature businesses and enterprises enter into immature industries. For example, if a long-term software company wants to launch a new product in an up-and-coming field like AI, it may need to spend more on advertising to accomplish the same success it already experiences with minimal advertising in its existing niche.

Strength of the business’s website

When consumers click on digital ads, they often arrive on a landing page or other website page for the business or company. How effective that page or site is in capturing user attention and converting the visitor to a qualified lead or customer has a huge impact on ROAS. Consider some simple hypothetical math:

  • An ad campaign drives 1,000 users to a website for a total cost of $2,000. Only 10 people become customers. That’s a cost per acquisition (CPA) of $200.
  • An ad campaign drives the same number of users at the same cost. However, 100 people convert. The CPA is now $20.

 

Assume for this discussion that this is the same business selling the same product. Clearly, something is more effective in the second scenario. Often, the difference is with the business’s website.

What makes for a strong website?

This is a question that could be answered in its own guide, but some basics of strong landing pages and sites include:

  • High relevance to the keywords and intents that the ad targets
  • High-quality, helpful copy
  • Strong calls to action that inform users on what steps to take next
  • Mobile-friendly formatting and responsive design
  • SEO-rich copy that helps the page show up higher in the search engine results so you get double-duty out of your pages

A well-developed sales funnel

Depending on your client’s business model, the sales funnel may encompass much more than a landing page or website. In these cases, the strength of the entire sales funnel can impact ROAS. Typically, the more efficient sales and customer onboarding processes are, the better you can expect ROAS to be.

The average cost of goods or services

The ROAS you can achieve with high-volume, high-dollar products is often better than what you can achieve with low-volume, low-dollar products. For example, designer clothing that sells for $100 or more (and sells frequently) may generate better ROAS than fast-fashion products that sell for $20 or so.

It’s simple math at this point. While the designer clothing brand may need to run more ads to connect with the right consumers, it probably won’t have to run five times as many ads than the lower-cost brand.

Product lifecycle

As hinted at above, how often purchases are made impacts ROAS. Consider an example where a software company sells forever licenses for $50. Now compare it with a SaaS company that sells user subscriptions for $15 per month. While the ROAS for the first company might be better at first, the long-term ROAS may be better for the SaaS company because customers continue to pay for the product.

Ad quality and relevance

Of course, better ads drive better performance—including quicker and increased conversions. That better performance leads to a better ROAS.

What makes for a high-quality ad? Some traits of excellent ads include:

  • Relevance. Ads that speak directly into the hearts and minds of a target audience are most likely to get the click. But an ad that seems to relate to the person’s current needs or challenges will also get attention.
  • Catchy. Ads compete with other ads, online content, offline distractions, and many other factors. Catchy phrasing and design are critical to performance.
  • Strong CTAs. Don’t leave the user guessing. Tell them what to do and why. “Click for free shipping” is an example of a potentially good CTA.

11 tips for improving ROAS

When you sell digital marketing strategy and other services, you need to demonstrate that those services are valuable. One way you can do that is in showing your client a robust ROAS. Check out the 10 tips below for increasing ROAS average so you can wow your clients.

  • Verify the accuracy of your ROAS calculation. If you start with the wrong data, your ROAS figures may be artificially low. Work with any business partners, including your white-label PPC partner, if applicable, to gather data so you can calculate the most accurate ROAS possible.
  • Rev up your landing pages. The purpose of ads is to send people to landing pages or other locations where they can get more information and—hopefully—move further into your funnel. If your landing pages aren’t up to the task, you’re paying for clicks that don’t go anywhere else.
  • Add negative keywords. Better target your ads by using negative keywords. These are keywords that might seem related to your campaign but that you want to ignore because they aren’t typically aligned with the intent of your target audience.
  • Engage in A/B testing. Never stick with the first ad you come up with. Run variations and test CTAs, ad copy, visuals, ad times, keyword groups, landing pages, and anything else you can tweak to find what works best for your clients and their audiences.
  • Align your messaging. When offering digital advertising services, take time to align all messaging with the client’s brand voice and other marketing content. Ads should provide the same information consumers can find on landing pages or the client’s social media platforms.
  • Verify your keywords. Pay attention to keyword trends and make edits to keyword groups for ads when necessary. If you’re working with a service that offers white-label PPC management, ensure that your partners pay attention to such details too.
  • Define audience segments. Avoid launching ad campaigns to your entire audience. Instead, look at the intents and needs of various audience segments. You might notice that some people are motivated by savings while others need convenience more. Your ads for each segment should speak to those motivations.
  • Take a big-picture approach. Consider how other marketing efforts might work together with ads and search engine marketing to drive better results. Do this even if you’re only providing PPC management for your client.
  • Schedule ads and budget allocation. Use ad automation to ensure ads show up at the right times for various users. You might want more ad activity on the weekends or evenings, for example, or want to ramp up ad budgets during certain seasons.
  • Diversify your ad platforms. Test out different platforms. Try Google Ads as well as ads on platforms such as Instagram, Twitter, or Facebook.
  • Invest in accurate conversion tracking. Strong advertising intelligence helps you track conversions so you are better able to point to the impact of PPC ad management on a client’s sales.

Frequently asked questions about ROAS

How does ROAS differ across various advertising channels, such as Google Ads, Facebook Ads, or Instagram Ads?

Ads don’t perform exactly the same across all channels. Some channels are more expensive to run ads on for various reasons, and the return on your ad investment per channel can vary depending on your business or audience type. Facebook, for example, tends to deliver a higher ROAS than many other channels. However, for businesses targeting younger users more likely to be on TikTok or Snapchat, this may not be the case.

How does the ROAS performance vary based on the specific goals of the advertising campaign (e.g., brand awareness, lead generation, e-commerce sales)?

One major difference is that you measure the return differently. If your goal is brand awareness, you’re looking for impressions or traffic. Lead generation goals are measured by how many qualified leads enter the funnel, but e-commerce sales require a final purchase conversion. Typically, ROAS ratios grow the further you go down the funnel because you’re engaging in further activity to drive the consumer toward a purchase. You may also need to consider the impact of hybrid approaches, such as when you’re packaging SEO and PPC management, as other digital marketing efforts can impact ROAS performance.

About the Author

Lawrence Dy is the SEO Strategy Manager at Vendasta. His career spans from starting as a Jr. Copywriter in the automotive industry to becoming a Senior Editorial Content Manager in various digital marketing niches. Outside of work, Lawrence moonlights as a music producer/beatmaker and spends time with friends and family.

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