Regarding online advertising, ROAS—or Return on Ad Spend—is a key metric determining how well your campaigns perform. It’s a simple but powerful way to measure how much revenue you’re earning for every dollar spent on ads.
But how much ROAS is good? Or, to put it another way, what is considered a good ROAS? Here, we’ll break down everything you need to know about this essential metric, from how to calculate it to understanding what qualifies as a “good” ROAS in different scenarios.
1. Calculating ROAS
Calculating ROAS is straightforward. The formula is:
Let’s look at an example. If you spent $1,000 on a Facebook ad campaign and generated $5,000 in sales from it, your ROAS would be:
In this case, a ROAS of 5:1 means you’re making $5 for every $1 spent. Calculating ROAS is crucial because it shows how well your advertising spend pays off.
2. What’s Considered A “Good” ROAS?
When people ask, “What is a good ROAS?” the answer isn’t always clear-cut. A good ROAS depends on your business type, profit margins, and campaign goals. Generally speaking, many companies aim for a ROAS of 3:1 or higher, meaning they make at least $3 for every $1 spent on ads. However, different business models and industries have different ROAS standards.
Here’s a general breakdown of what’s considered a good ROAS:
- 3:1 or higher – Ideal for most businesses, as it covers costs and provides a reasonable profit.
- 4:1 to 5:1 – Often considered a strong ROAS and indicates effective campaigns with a high return.
- 10:1 or higher – Exceptional, particularly for high-margin products.
However, these numbers are just guidelines; what’s “good” will vary depending on several factors, which we’ll discuss next.
3. Good ROAS By Industry
Your industry can greatly impact what is considered a good ROAS. Different industries have varying expectations based on their typical profit margins, customer acquisition costs, and advertising competition levels.
Here’s a look at some industry ROAS benchmarks:
- E-commerce & Retail: A ROAS of 4:1 or higher is often considered good, especially since customer acquisition costs in this space can be high.
- Service-Based Businesses: A ROAS of 3:1 or higher may be sufficient for service providers, as these businesses often have lower overhead costs.
- Luxury Goods & High-Margin Products: Given their high-profit margins, these industries can sometimes be profitable with a ROAS of just 2:1.
- Low-Margin Products (e.g., Wholesale/Retail): Low-margin industries typically aim for a ROAS of 10:1 or more to ensure profitability.
In short, each industry has unique ROAS expectations, so understanding where your business falls can help you set realistic goals.
4. Industry Standards And Benchmarks
Knowing your industry’s benchmarks can help you set a meaningful ROAS target. Due to intense competition, highly competitive industries, such as fashion and consumer electronics, often require a higher ROAS to stay profitable.
On the other hand, niche industries with loyal customers may achieve success with a lower ROAS because their acquisition costs are lower.
Checking industry reports or studying competitors’ ad performance can provide insights into what’s reasonable for your market, giving you a solid campaign starting point.
5. Campaign Objectives And Goals
Your campaign’s objective is a critical factor in determining a good ROAS. Not every campaign is designed to drive immediate sales; some focus on brand awareness or customer engagement, which may yield a lower ROAS but still be valuable.
- Direct-Response Campaigns: These are aimed at immediate conversions and should have a higher ROAS target, often 3:1 or more.
- Brand Awareness Campaigns: If your goal is visibility rather than immediate sales, a ROAS of 1.5:1 or even 1:1 can still be considered good, as it may lead to future sales through increased brand recognition.
Aligning your ROAS targets with your campaign objectives is essential for measuring success accurately.
6. Customer Lifetime Value (CLV)
One aspect that ROAS doesn’t directly capture is Customer Lifetime Value (CLV). CLV is the total revenue a business can expect from a customer over the entire relationship period.
For businesses with high repeat customers, such as subscription-based models or brands with strong customer loyalty, a lower ROAS may still be profitable if customers tend to return and make future purchases.
For example, a business with a subscription model might be content with a lower initial ROAS, knowing that customer loyalty will generate more value over time. In cases where CLV is high, it can be beneficial to lower your ROAS expectations to focus on customer acquisition.
7. Target Audience and Market Saturation
Your target audience and market saturation will also influence your ROAS. Highly saturated markets often have higher advertising costs, making achieving a high ROAS challenging. In these cases, narrowing your audience or targeting specific demographics can improve performance.
Refining your audience targeting and tailoring ad creatives to speak directly to them can also improve your ROAS. By reaching the right people with the right message, you can increase conversion rates and maximise the return on your ad spend.
8. Testing And Optimisation
Improving your ROAS isn’t a one-time effort. Testing and optimisation play a massive role in ensuring your advertising dollars work as hard as possible. Continuous A/B testing for ad creatives, targeting, and bidding strategies can yield insights into what works best.
- A/B Testing: Experiment with different ad headlines, images, and calls-to-action (CTAs) to identify which combinations produce the highest ROAS.
- Adjust Bidding Strategy: Platforms like Google and Facebook offer various bidding strategies. Experimenting with these can help lower costs and increase returns.
- Optimise Conversion Tracking: Accurate tracking is essential. Ensure you capture every conversion so that your ROAS calculation reflects true performance.
With the right testing and adjustments, you can gradually increase your ROAS, even if initial numbers are low.
9. Improving Your ROAS
Improving your ROAS takes time and regular tweaks, but you can see better returns over time with the right adjustments.
Let’s look at a few practical ways to boost your ROAS:
- Refine Audience Targeting: The more specific your targeting, the more likely you are to reach people ready to convert. Use custom and lookalike audiences to refine your reach.
- Improve Ad Quality: High-quality visuals, engaging copy, and compelling CTAs can significantly increase ROAS.
- Use Retargeting Ads: Retargeting allows you to reach people who have already shown interest in your brand, which often leads to higher conversion rates.
- Experiment with Different Ad Formats: Try a mix of video, carousel, and static image ads to see what resonates best with your audience.
- Focus on High-Performing Platforms: Allocate more budget to platforms or campaigns with a history of high ROAS and shift resources away from underperforming ones.
Conclusion About Good ROAS
As you measure success, remember that ROAS is just one piece of the puzzle. Considering CLV, audience saturation, and continual testing, you can set realistic ROAS goals aligning with your business needs. Ultimately, ROAS is a powerful metric that, when used strategically, ensures every dollar spent on advertising brings you closer to your business goals.
If you’re ready to take your ROAS to the next level, let the Best Marketing Agency help you. With our top-notch SEM marketing in Singapore, comprehensive SEO services, and a free SEO audit to uncover your business’s untapped potential, we can help drive your brand’s growth and deliver measurable results.
Reach out to us today and discover how we can optimise your advertising spending to maximise your returns.
Frequently Asked Questions About Good ROAS
Can A High ROAS Ever Be A Bad Sign?
A very high ROAS could indicate you’re underspending advertising and missing out on potential growth. It might mean there’s room to increase ad spending to capture a larger audience and maximise total revenue.
What’s The Difference Between ROAS And ROI?
ROAS measures revenue earned per dollar spent on advertising, while ROI (Return on Investment) considers the total profit after all costs, including production and operational expenses. ROAS focuses specifically on ad spend efficiency, while ROI provides a broader view of overall profitability.
How Does Ad Platform Choice Affect ROAS?
Different platforms yield varying ROAS results due to user intent and engagement. For instance, Google Ads often have higher ROAS due to search intent, while social media ads may have lower ROAS but can drive brand awareness.
Can ROAS Be Improved Without Increasing Ad Spend?
Yes, improving ROAS doesn’t always require more ad spend. Optimising ad targeting, refining creatives, and adjusting bidding strategies can enhance ROAS by making the existing spend more effective.
