ROAS for Small Business: How Can You Maximize It?

What’s The Best Way To Improve ROAS For Small Business?

We generated a ROAS of 21.71 for this custom fabric company.

Now we know what you’re thinking, “Hey, that’s amazing!”

Well, what if we told you that you can do the same for your business, in just a few simple steps?

Keep reading because we’re sharing how you can maximize your ROAS and more in this post.

We’re going to cover what is ROAS, as well as how to calculate it.

And if you stay until the end, we’ll go over the best part: how to maximize your ROAS.

Let’s get started!

What Is ROAS?

Here at LYFE Marketing, we often get asked the question- “what even is ROAS?”

Most people think ROAS is going to be a big, scary formula that is impossible to calculate. But luckily, it’s actually not hard at all.

So let’s jump right into it! 

To start off, let’s talk about what ROAS stands for. ROAS stands for return on advertising spend.

The actual definition for ROAS is the ad revenue earned based on total advertising spend.

Now you might be thinking that sounds a lot like ROI, or return on investment, but they are not the same.

While they are very similar, ROAS focuses specifically on the money put into an ad campaign.

Think of it like this: ROI is more all-encompassing of everything you’ve spent to get your return such as paying for labor, etc.

Whereas, ROAS specifically measures how much you spent on your advertising campaign to get your return.

You never want your business to be wasting money on ad campaigns that aren’t beneficial, which is why tracking ROAS is so important.

With ROAS, you will be able to see how your ad spend can be used to create the most success for your business.

ROAS Formula: How To Calculate ROAS For Small Business

Now that you know what ROAS is and what it’s used for, let’s get into how to calculate it for your business.

You can calculate the overall ROAS for all of your advertising expenses and the revenue that resulted from them.

Or, you can calculate ROAS for individual ad campaigns, ad sets, and ads. 

This allows you to see how successful each working part of your ad campaign is.

You’ll be able to better detect any issues that may be occurring, and how to address them.

The formula for calculating return on ad spend is this: 

ROAS = Revenue/Advertising Costs

So let’s say you own a business whose return on ad spend is 3:1.

That means that for every $1 that you spend on advertising expenses, your business earns $3 in revenue.

If your business’s ROAS is 5:1, that means that for every $1 that you spend on advertising expenses, your business earns $5 in revenue.

Now to use it in a real scenario, let’s say your company were to spend $4,000 on an advertising campaign.

If the campaign yields a revenue of $20,000, the ROAS would be 5:1. This is because the revenue, $20,000, divided by the ad spend, $4,000, equals $5.

So for every dollar that your company spent on the ad campaign, it generated $5 of revenue. 

Let’s try one more time, just to make sure you got the hang of it.

If your company spends $1,000 on an advertising campaign, and it yields a revenue of $10,000, what would be the campaign’s ROAS?

We’ll give you a few seconds to think about it…

If you said 10:1, you are correct!

The revenue, $10,000, divided by the ad spend, $1,000, equals $10. This means that for every dollar spent on the ad campaign, it yields $10 of revenue.

Make sure that when calculating your ad spend, you look at how much you spent on the ad campaign as a whole…

…not just how much you spent for a conversion.

In your total ad spend amount, you have to include the amount of money that your company pays per click, engagement, or impression for your ad campaign.

Whether it be paying per click, engagement, or impression depends on the way you are being charged for your campaign.

But regardless, you must account for these costs.

So you might be feeling like a master at ROAS calculation now…

…but it can get pretty time-consuming as your company grows, especially if you are running multiple ad campaigns at once.

Luckily, there are many free applications that can help you calculate your ROAS for you.

That is, if you wish to use them for your business like this one here.

Plus, most digital advertising platforms like Facebook automatically calculate your ROAS for you.

This makes it super easy to see how your campaign is performing.

What Is A Good ROAS For Small Business?

So now you know how to calculate your company’s ROAS, but what is a good ROAS to aim for?

Generally speaking, a 4:1 or higher ROAS is typically considered good, although it really depends on your company.

A good ROAS to one company could be considered a bad ROAS for another, and vice versa. 

Every business has a different idea of what is considered profitable. It mainly depends on the business’s profit margins.

Start-up businesses often need to have high-profit margins in order for them to stay successful.

On the other hand, some companies can stay profitable while having temporarily lower profit margins.

If a business has a low-profit margin, that means that they need to keep advertising costs low and needs a high ROAS to grow.

While businesses with high-profit margins are able to spend more money on advertising and can survive having temporary low ROAS. 

To put it in simpler terms, companies that have lower profit margins…

…have to make the small amount of money that they are able to spend on advertising, generate a large amount of revenue, aka high ROAS.

The first step to figuring out what a good ROAS is for your business is to determine your profit margin and what other operating expenses you have.

If you have a high-profit margin, your business could still be profitable with a lower ROAS.

But on the other hand, if your profit margin is low, you’re going to need to maintain a high ROAS to be profitable.

Once you figure out what you believe is an acceptable ROAS…

…you can start calculating to see if your business’s advertising expenses are generating enough revenue for your business.

So we know this probably wasn’t the answer you were hoping to get for the question- “what is a good ROAS?”

But now you know that it really differs for every company.

Remember, as a general rule of thumb, a ROAS of 4:1 or higher is typically considered profitable.

6 Tips On How To Maximize Your ROAS

So the last thing you probably want to know is the things you can do to maximize your business’s ROAS.

Luckily, we have some expert tips for you!

1. Do an audit and perform A/B testing
2. Use refined keywords
3. Relevancy
4. Bid on your own brand name
5. Use a program that automatically adjusts your bids in real-time
6. Focus a lot on conversion rate optimization (CRO)

1. Do an audit and perform A/B testing

If you notice that your ads aren’t performing well after around two weeks, you need to look into what needs to be changed.

You may also want to perform tests, such as A/B testing, to find out what can improve the success of your ads.

We have a post here on Facebook ad testing that you also might be interested to read next.

Running campaigns that are not delivering positive effects for a long time can be very harmful to your business.

And, it can cause large losses that could otherwise be avoided by checking on and calculating ROAS often.

This is so that the campaign can be stopped or changed early on when you notice it not producing good results.

And, the business can counter the negative effects that the unsuccessful campaign had on their business.

2. Use refined keywords

When selecting keywords for your ad campaigns on Google, try to make them specific for your product, service or brand.

For example, if you were creating an ad for a pair of white women’s sneakers, you wouldn’t want to just use the keyword “sneakers.”

Instead, you should be using “white women’s sneakers.”

Using these long-tailed keywords that are very specific to your advertisement will ensure that the keywords you are bidding on are less competitive.

Thus, giving your ads a chance to rank higher on search engines.

Also, including keywords that indicate that the potential customer is further up in their buying process…

…and more likely to actually buy the product or service, such as “free shipping,” could really improve your ROAS.

We go more in-depth into keyword research and Google advertising in our ‘What Is PPC?’ post so be sure to read it next.

3. Relevancy

On Google, make sure that your ad is actually relevant to the keywords you are choosing.

This will ensure that when a customer searches and your ad appears, they will actually be interested in what you are offering.

This also applies to social media ads.

Facebook, for example, uses a metric called the ‘relevance score’ to measure how well your ads are resonating with the audience.

This helps you see how well your advertisements are performing in comparison to other advertisements competing for the same audience.

And, it helps you know what you could be working on to improve them. They focus on three diagnostics:

• quality,
• engagement rate, and
• conversion rate.

These three things are given a measurement of average, above average, or below average.

Facebook even provided everyone with this chart…

…that explains possible suggestions on how to improve your ads, depending on what ranking you received.

4. Bid on your own brand name

On Google, when someone searches specifically for your brand…

…you wouldn’t want your competitor’s brands to rank highest and show up before your actual brand, right?

Well the best way to ensure this doesn’t happen, is to run brand campaigns.

This means you will be bidding on your branded keywords including:

• your actual brand name,
• popular misspellings of your brand name, and
• specific product names.

5. Use a program that automatically adjusts your bids in real-time

There are many advertising platforms out there that will automatically adjust your bid amounts based on many factors.

This could be based on time of day, location of the customer, and many other factors that could change over time.

This will ensure that you have higher bid amounts for those high-value targets and that you aren’t wasting too much money on low-value targets.

An example of this kind of tool is for Google Ads.

If your business uses Google Ads, you should take advantage of their tool “Target ROAS bidding.”

This tool allows you to set your bids based on your target return on ad spend.

Now if you’re wondering how that possibly could work, Google says this:

“Google Ads will set maximum cost-per-click (max. CPC) bids to maximize your conversion value…

…while trying to achieve an average return on ad spend (ROAS) equal to your target.”

We’re not going to spend too much time covering this tool…

…but just know that it could be really useful for your business, so you should definitely check it out!

6. Focus a lot on conversion rate optimization (CRO)

Improving your conversion rate optimization will increase the number of people that engage with your ads…

…and actually end up purchasing your product or service.

There are a ton of things you can do to improve your CRO, but for this post, we’re just going to mention two:

a. Always make sure your landing pages match up with the content presented in your advertisement.

Customers will likely be confused and/or irritated if the landing page they are sent to doesn’t match up with their expectations set by the initial advertisement.

This can result in them exiting the page quickly without taking the desired action.

If you want to learn more landing page optimization tips, here’s our post for that.

b. Work on ways to decrease the percentage of customers who abandon their carts at check-out.

This can be done in many ways like:

• offering shipping discounts,

• sending “abandoned cart” emails,
• retargeting previous website visitors, and
• showing that your site is secure.

There are many other ways you should be improving your conversion rate optimization as well.

But we have to add one disclaimer. ROAS specifically helps you monitor your ad campaign…

…but doesn’t always account for outside factors that could ultimately be impacting your revenue, like high shipping costs, website issues, etc.

So if you’ve exhausted every area of optimization within your ad campaign and you’re still not getting good ROAS…

…you might want to look at some of those other factors.

Now that you have learned everything you need to know, you should be an expert at calculating and maximizing the ROAS for your business!

But if you really want to maximize your ROAS, why not work with our online advertising agency? Contact us today to get started!

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