This is episode 37 of Season 2 for the OMGrowth podcast.me>
When you hear people talk about running ads, the focus is often on your Return On Ad Spend – or what the cool kids call your ROAS – but as important as that number is for you to know, it isn’t THE MOST important number to you – and to your profitability!
On today’s episode, we’re taking the mystery out of what matters when you’re looking at ad spend, ad revenue, and what it all means to your bottom line.
WHAT IS ROAS?
Return on Ad Spend – also called ROAS – refers to how much revenue your business earns for each dollar spent on ads.
The key word here: REVENUE.
We’re not talking about profitability.
Just because you have a “good return on ad spend” doesn’t make you profitable.
Your ROAS may not help you calculate your profitability – and we’ll talk more about calculating profitability a little later – but what ROAS does help you calculate is the effectiveness of your advertising efforts and dollars.
It’s a super-simple calculation that looks at 1) your total conversion revenue and you divide that by 2) your total ad spend. Super-DUPER-simple, right?
Let’s make an example of ROAS, shall we? Say you have a $20 product you are selling and promoting via ads and you sell 5 of those bad boys… this means your total conversion revenue is $100.
And let’s say you spent $50 on ads during this time period to bring in $100. Because your return on ad spend is represented by a ratio, this means your ROAS is 2.0, meaning the $50 you spend resulted in a 2.0 return, or $100.
Even with all the changes happening in the online world, the formula to calculate your Return On Ad Spend doesn’t. Furthermore, regardless of how much Facebook Analytics changes its dashboard and whether or not the cookies and pixels report on the sales being made, you are still entirely able to generate this number for yourself. After all, we’re talking about your product price, your sales and your ad spend – you don’t need cookies or a tracking pixel to know and report on these.
IMPACTING YOUR ROAS
There are 2 factors to consider when you’re looking to impact or change the ratio of your ROAS:
- your ad cost;
- your revenue per conversion.
Chances are that the product or service you’re selling via ads probably won’t have a whole lot of wiggle room in terms of its price (and even if it did, who wants to see an ad for a product where the price changes faster than the value of Bitcoin, amirite?).
However, there’s a lot you can do to change your ad cost.
Before we get into that, though, notice that I use the word “change” and not “improve”.
Just because you change your ads doesn’t mean it’ll improve your results… but tweaks and changes ARE necessary to test what WILL improve your ads.
Some of the changes that will impact your ROAS include:
- Audience Targeting (including retargeting, geo-targeting, targeting by gender and/or age, cold targeting vs lookalike audiences, etc.);
- Use of Creative Assets (images, video, etc.);
- Messaging, copy and call-to-action (CTA) used in and on the ad;
- Landing Page (and this is a big one because if your warm, nurtured traffic isn’t converting, don’t expect ad-driven traffic to be any different); and
- Ad Placement.
There’s a lot you CAN do to impact your return on ad spend – and sometimes those impacts will generate better results, and sometimes those impacts will suck big time – but it’s all information you can use to better understand what your audience responds to.
When you commit to paying for ads, you’re committing to a wash-rinse-repeat experiment of testing and tweaking, over and over again.
And while you need to make sure your ads are effective – which is what your return on ad spend does for you – it doesn’t necessarily comment on your profitability.
REVENUE VS PROFIT
When someone’s not-so-humblebrag about a million dollar launch shows up in your feed, you can assume they’re talking about revenue and not profit.
Unless you know what they spent to make that million dollars, you have no idea whether they were profitable and to what degree.
Profits and revenue are different. So are the metrics that represent them.
I know a lot of you love when people share their income reports, but I fan-girl way harder over the reports that focus on percentages and profit margins. These stories feel way more useful to me because they tend to break down HOW the bottom line and take-home pay was created in a way that straight-up numbers and dollars figures don’t do.
WHAT IS ROI?
This is where your Return On Investment comes into play – or what the cool kids call your ROI – because the focus here is on the actual profits you’re making in return for what you spent.
The revenue you generate from ads is important… but it isn’t everything. In fact, you can lose money on ads and still be profitable.
Say what? Yup, totally possible and a lot of people are doing it.
Let’s talk about the Tiny or Self-Liquidating Offer ads – or what the cool kids call SLO ads – because these are ads that promote a low-priced offer, usually between $9-$39.
In many cases, you can see a sad ROAS and still be happy about your ROI because that advertised offer was just the initial purchase; there’s a whole email sequence in the back-end designed to promote a second, more expensive offer and this is where the profit comes in.
Say you’re running one of these SLO ads and you have a ROAS of 0.8 for a $20 product. This means that if you sell 100 units, you’ll bring in $2,000… but it’ll cost you $2,500 to make those sales.
At the surface, it looks like you’ve lost $500.
Except your initial offer is essentially a tripwire or automated flash sale – a low-priced product designed to be a no-brainer purchase that will deliver a ton of value – and your email sequence in the back-end is doing all the heavy-lifting.
This email sequence may be called an evergreen or nurture sequence but let’s say yours converts at 3%, meaning 3 out of every 100 people who go through your evergreen email sequence buy your “next-level” product, which is priced at $500.
In this case, even though your return on ad spend is -$500 for every 100 people who buy your low-priced offer, your return on investment is actually +$1000.
Why? Because you’re 3 upsells at $500 = $1500 and after you account for that $500 loss, you still profit $1000 at the end of the day.
The more complex your sales funnels are, the more complex it is to calculate your ROI.
But it is important to your profitability for you to know and track.
WHICH IS BETTER: ROAS vs ROI
Which is why asking whether ROAS or ROI is better will always be greeted by the most-dreaded of all answers: “it depends!”.
What it depends on, though, is “what do you want to know?”
Have you ever noticed that while you may get overwhelmed by analytics or you diagnose yourself as “not being a numbers person”… and yet, you live for a good infographic?
Let me tell you why: because the infographic has a headline and provides you with the story or context they’re trying to impart.
“Who spends more on avocado toast: Gen Z or Millennials?”
“A visual representation of the racial wage gap.”
“A map of the most popular fast food chains by region.”
We love this kind of data because we KNOW what we’re looking at. There’s a story here, there are conclusions to be drawn, we KNOW what we’re looking at.
Meanwhile, the exact same thing happens in reverse when you open up your own data without having a question in mind or without knowing what story you’re looking to build.
There’s a world of difference between asking yourself “what needs to happen for me to be profitable with a tiny offer” versus being handed a spreadsheet that you say, “what am I supposed to do with this?”
Indeed, what ARE you supposed to do with this?
It’s going to depend on what you’re looking to accomplish, which brings us to this week’s Action Items. In fact, this week, we’re keeping it simple with one single thing I would love for you to do:
IGNORE INDUSTRY AVERAGES
Please. For the love of everything good and honest and pure, you don’t have to care or pay attention to what everyone else is doing when you know. your. profitability. numbers.
You immediately – like SNAP! – stop caring about someone else’s return on ad spend is or what their launch revenue is when you’re clear about what numbers you need to see in your own sandbox and what to improve on.
I couldn’t think of an easier way to do this than to create THE ROI CALCULATORS for you which will show you – literally, you’ll see and be able to play with! – what it means for YOU and your bottom line to drop your cost per click by 10 cents or to improve the conversion rate on your landing page by just 1%.
You’ll find a link to that in the bio or the show notes, but it is THE single most actionable and empowering thing you can do for yourself when you start investing in ads or want to see a better return on your ads investment.
In a way that copying what someone else says is working for them never will!
When a 1% improvement can result in 10s of thousands of dollars of extra profit, you want to know about it.
Get clear about what profitability means for you and understand – not only what makes you profitable but – which specific, small tweaks and changes can have a massive impact to the bottom line of your profitability.
Because even if you self-identify as “not a numbers person”, that doesn’t mean you can’t be a mad-profitable person. And someone else’s income report isn’t going to tell you where those Mario World magic mushrooms are for you like seeing it for yourself!