How to Achieve Positive Return on Advertising Spend
Online advertising is one of the most powerful tools that a midsize company has at their disposal to acquire new customers. Paid online advertising can be relatively cheap, easily integrated into social media, and allows for a level of personalization that is not possible through traditional marketing outlets.
Despite these advantages, paid online advertising is not right for every company. Paid advertising must be driving the right kind of customers such that the cost of growth is worth it.
To properly allocate marketing budget, stakeholders must understand their Return on Advertising Spend, or ROAS. This metric takes into account both the return a company has achieved due to a particular ad and the cost of that ad.
WHAT IS ROAS?
ROAS is the revenue a company makes from a particular ad divided by the amount that the company spent on that ad. For example, if a company spends $1,000 on an ad and makes $2,000 from the new customers that the ad brings in, the ROAS for that particular ad is $2,000 / $1,000 = $2. For every $1 spent on the ad, the company makes $2.
If the ROAS for an ad is over $1, you have broken even and the ad is generating more money than it costs. It is up to the marketing analysts and stakeholders to decide how much of a return is worth the cost.
Keeping track of both growth and cost of growth is important for any company. It can be particularly important for small or medium sized business that cannot afford to waste money on online ad campaigns that end up costing the company more money than they generate. They need to make money off of every single dollar that they spend, and calculating ROAS is the best way for companies to ensure that their online ads are truly worthwhile.
HOW IS ROAS MEASURED?
Measuring ROAS depends on keeping track of the particular ad that a customer was acquired through, and how much revenue that customer generates.
Most marketing teams are given a budget and operate within their own vendor’s data tools, with Google Adwords and its associated Analytics Portal being a prominently used tool.
However, many experience issues when relying on vendors’ representation of their company’s customer data. This may have to do with your company’s Adwords implementation, or the nature of the limitations of the Adwords Analytics Portal. Marketers need a tool that is both flexible and precise, especially when deciding where to allocate precious marketing spend.
A CREATIVE SOLUTION
Here at UpCounsel, we decided to get our Adwords click data out of the Adwords Analytics Portal and into our own data warehouse, where we combine this click data with all the other data that our company collects.
Google provides a unique click identification (Google Click Identifier or gclid) for each unique click and its associated metadata. Both can be imported into a data warehouse using the Adwords API via the Click Performance Report. Companies can then join this data to their own user data using the gclid. Google provides this gclid as a URL parameter whenever a user hits a site through an ad. This URL containing the gclid can be recorded in your data warehouse and associated with a user. Now both the data from the Google Adwords API and your company’s own data are joined in your data warehouse.
This idea provides an unprecedented degree of flexibility, and greatly expands the range of questions that you can start asking of your paid clickers: Did the customer become a one-time or a long term customer? How long did it take for the ad clicker to become a customer? How much did the customer truly end up spending? How much did they spend within 30 days? What is their Lifetime Value (LTV)? What is the true revenue generated from this customer? Do I want to consider discounts, chargebacks, or refunds?
The answers to these questions represent the true ROAS of a certain ad’s clickers, and companies can segment this data in any way they wish. Some customers are more valuable than others, and companies want to optimize their paid ads for these customers.
At UpCounsel, using this method of calculating ROAS also allows us to track which clicks do not become paying customers and at what stage those potential customers stop using the product. That data enables us to visualize the big picture, improve our platform and retain more customers.