In a nutshell:
- ROAS (Return on Advertising Spend) is a crucial KPI that measures the revenue generated from advertising investments.
- Analyzing ROAS helps marketers make informed decisions about future investments and optimize marketing efforts for maximum returns.
- Low ROAS can be due to ineffective targeting, poor ad copy, low-quality landing pages, or a lack of optimization.
- To increase ROAS, marketers should focus on targeted advertising, optimized ad copy, conversion rate optimization, data-driven decision-making, and predictive analytics.
- Improving ROAS leads to improved profitability, enhanced marketing efficiency, increased ROI, and overall business growth.
It's the acronym that beleaguers many a marketer: ROAS, or return on ad spend. If you're under pressure to increase your ROAS, you're not alone.
According to one report, digital advertising wastage was up to $6.149 billion in 2023, according to Next&Co’s annual Digital Media Wastage report.
No one wants to waste their ad budget, and increasing marketing efficacy should always be a good goal. This blog post offers some context for ROAS and some strategies for improving yours — especially with a helping hand from AI.
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Understanding ROAS: What It Means and How It Works
Let's start with the basics. In marketing, Key Performance Indicators (KPIs) are crucial in measuring the effectiveness of various strategies and campaigns. One such KPI that holds significant importance is Return on Advertising Spend (ROAS).
ROAS is a metric that helps marketers evaluate the revenue generated from advertising investments. A critical aspect of ROAS calculation is considering the impact of different advertising campaigns.
If you analyze the performance of various ad campaigns, you can identify which ones are generating the highest returns and allocate your resources accordingly.
As a whole, ROAS measures the effectiveness of marketing efforts by calculating the ratio of revenue generated to the cost of advertising.
The Significance of ROAS
While it can be a controversial metric, ROAS is a vital KPI for many marketers as it provides valuable insights into the profitability of their marketing campaigns.
Through analyzing ROAS, you can determine the success of your advertising strategies and make informed decisions about future investments. This KPI allows marketers to assess the effectiveness of different channels, campaigns, and target audiences. Of course, you'd then want to optimize theser marketing efforts for maximum returns.
With digital marketers wasting millions every quarter, demonstrating you're achieving a good ROAS is essential to validate marketing's contribution to the business.
Identifying the Causes of Your Low ROAS
There could be several reasons why your ROAS is low. When planning an advertising campaign, it's essential to consider the overall marketing mix.
Marketers can create a cohesive and impactful campaign by strategically combining online and offline marketing channels that include TV, radio, print, and digital. This holistic approach can contribute to a higher ROAS by reaching a diverse audience and maximizing the effectiveness of each channel.
Still, low ROAS can happen, and it could be due to ineffective targeting, poor ad copy, low-quality landing pages, or a lack of optimization. It's hard to know for sure, but there are definitely solutions to explore.
Analyzing your data and making data-driven decisions can help identify the specific areas that need improvement to increase your ROAS.
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Proven Strategies to Boost Your ROAS
To increase the ROAS, marketers need to focus on several key factors that can positively impact this KPI:
- Targeted Advertising: It's critical to identify and target the right audience so you reach the most relevant potential customers. This improved targeting reduces wasted ad spend and increases the likelihood of generating higher returns.
- Optimized Ad Copy: Crafting compelling and persuasive ad copy is essential to capture the attention of potential customers. Marketers can increase click-through rates and conversions by creating engaging and relevant content, ultimately leading to a higher ROAS. Using generative AI to experiment with copy options can also be a useful strategy.
- Conversion Rate Optimization: Improving the conversion rate of landing pages and websites is crucial for increasing ROAS. Focus on optimizing the user experience, streamlining the conversion process, and implementing effective call-to-action strategies to drive more conversions.
- Data-Driven Decision Making: Utilizing data analytics and tracking tools can provide valuable insights into the performance of marketing campaigns. Your data can help you identify underperforming areas and make data-driven decisions to optimize their strategies, ultimately increasing the ROAS.
- Predictive Analytics: Instead of just analyzing historical data to try to develop ways to increase ROAS, consider how that data could be used as the basis for predictive modeling. Predictive analytics involves building models that predict future customer behavior, such as lifetime value or VIP customer status. You can focus your marketing spend on campaigns bringing in high-LTV or VIP customers if you can tell in advance which ads and campaigns will provide those results.
Leveraging Predictive Analytics for ROAS Growth
Let's dig a little further into how predictive analytics could help increase your ROAS. To be sure, ROAS is the result of many factors, but some of those are within your control.
Improving ROAS with Marketing Mix Modeling
For example, maybe it's time to take a hard look at your marketing budget allocation across channels. Marketing Mix Modeling (MMM) enhances ROAS by analyzing historical data to understand the impact of diverse marketing strategies on sales.
This data-driven approach aids marketers in making informed decisions about budget allocation across various channels, ensuring resources are directed where they yield the most value.
MMM identifies synergies between marketing elements. You can develop better-integrated strategies when you can see how your marketing channels each affect your results — sometimes even interacting with each other to make a more significant impact.
MMM also helps forecast future outcomes, allowing for proactive planning and adjustments (and Pecan even provides intuitive dashboards to guide your what-if scenario planning). By quantifying immediate and long-term effects, MMM guides marketers in optimizing their strategies, reduces inefficiencies, and helps you continually improve campaign performance, ultimately leading to improved ROAS.
One Pecan customer using MMM identified millions of dollars of ad spend that could be reallocated for more efficient use, ultimately boosting ROAS.
Photo by Pedro Forester Da Silva on Unsplash
Enhancing ROAS through LTV Prediction
Another AI solution for improving ROAS is to predict the LTV of customers or users acquired by each of your marketing campaigns. You can then foresee what the ROAS of each campaign will be.
For instance, with initial data from the first 24-48 hours of a new campaign, you can predict customer Lifetime Value (LTV) throughout the campaign's duration. This prediction could represent the total future value of the campaign generated over the next 30, 60, 90, or 180 days. This perspective might reveal unexpected successes in more extended time frames for campaigns that initially seemed less promising.
Embracing this forward-looking approach offers a clearer understanding of the lasting value generated by your marketing efforts and investments.
Rather than solely focusing on past events, you can anticipate your campaign's potential ROAS, even projecting up to six months ahead. Such insights are invaluable for teams aiming to enhance their marketing campaigns' ROAS.
For example, Pecan customer KSG Mobile, Inc., uses predictive LTV models to understand the likely ROAS of each of their campaigns. They get short- and long-term predictions to inform campaign investments and broader strategy.
“Pecan can see around the corner to those campaigns that may be outperforming longer term, without having all the actual revenue signals there early on," says Mike Eisele, vice president of business development at KSGM.
The Business Benefits of Elevating Your ROAS
When marketers successfully drive an increase in ROAS, they can expect to see several positive outcomes:
- Improved Profitability: A higher ROAS indicates that marketing efforts are generating more revenue compared to advertising costs. This excess directly translates into increased profitability for the business (and who doesn't like that result?).
- Enhanced Marketing Efficiency: Insights from your data can help you allocate resources more efficiently and focus on activities that yield the best results.
- Increased Return on Investment (ROI): As the ROAS improves, the overall ROI of marketing campaigns also increases. This increase means that for every dollar spent on advertising, the business generates a higher return, maximizing the value of marketing investments.
- Use Your Martech Stack to Its Potential: By adding predictive analytics into the mix, you can truly use the full value of all the customer data you've collected. You know having the data is significant, and you've developed solid systems to collect and organize it, but now it's time to put it to work for its maximum effectiveness to support your ROAS improvements. Only 4 in 10 businesses have their martech stacks well integrated, according to reporting by MediaPost, so you can quickly gain a competitive edge with better tech utilization.
- Business Growth: A higher ROAS not only signifies the success of marketing efforts but also contributes to the overall growth of the business. With increased revenue and profitability, your business can reinvest in further marketing initiatives, expand its reach, and capture a larger market share.
Odds are, increasing ROAS will be a crucial objective for marketers looking to optimize their marketing efforts.
By targeting the right audience, optimizing keywords and ad copy, improving conversion rates, and making data-driven decisions, marketers can drive positive change in this KPI. The resulting benefits include improved profitability, enhanced marketing efficiency, increased ROI, and overall business growth.
By prioritizing ROAS, marketers can ensure their marketing strategies are effective and contribute to the success of the business.
Want to see how Pecan could help you increase ROAS for your marketing campaigns? Get a guided tour today.
