What is ROAS and how to optimize it in advertising campaigns?

Wanting to promote your store or service online, there are two main promotion channels to consider: Google Ads and Facebook (or generally all platforms from META). Ads on these channels are an integral part of many companies’ business strategies. In the context of these platforms, one of the key goals is not only to reach potential customers, but also to achieve maximum ROI by optimizing spending and advertising strategies. In order for ROI to be highest, a variety of optimization techniques are used that take into account various metrics. One of the most important is target ROAS (tROAS). In this article, I will introduce what it is and how to use ROAS to achieve the best sales results.

What is ROAS?

ROAS, or Return on Ads Spend, is an indicator that allows you to evaluate the effectiveness of advertising campaigns, especially those aimed at selling products. It determines how much revenue each zloty spent on advertising generates. It is calculated according to the formula:

As an example, if an advertising campaign generated revenue of PLN 20,000 and its cost was PLN 2,000, the ROAS is 10 (or 1000%, depending on how you express it). This means that every PLN spent brought in PLN 10 in revenue.

Considering the definition, it is logical that the higher the ROAS achieved, the more effective the campaign is and the higher the company’s profit (assuming a fixed budget). However, it is worth remembering that ROAS is not the only indicator that should be taken into account. Depending on the industry, a different ROAS will mean the success of the campaign. It is easier to achieve a high ROAS by advertising more expensive products. The margin of our products should also be taken into account. If we earn 100% margin on each product, we can afford a lower ROAS because our profit will still be at a high level.

Optimizing ads based on ROAS

ROAS can be used to optimize online advertising campaigns (including Google Ads and Facebook). However, we will not want to optimize all campaigns for ROAS. For activities aimed at traffic or brand awareness, we will use other metrics, such as CTR or CPM. ROAS is primarily intended for campaigns that are designed to sell.

Since we have already established that we will use ROAS for product campaigns, it would be useful to know how to use it. 

The simplest way is to divide our products by criteria such as brand or category and create separate campaigns for them. This is possible both on Facebook (through product catalog) and on Google Ads (through Google Merchant Center). Initially assigning them similar budgets (or proportional to the number of products in the campaign) will allow us to evaluate their effectiveness later on. In this way, after a few weeks (or longer, depending on the industry), it will be possible to distribute the budget in such a way that the brands/categories that achieve the highest ROAS will receive the highest budget.

Within a campaign, we can also create several advertising creatives. Their effectiveness can also be compared on the basis of ROAS, which will allow us to identify the ad that sells the best (even in the case where the ad spending will not be equal).

The campaign can also be used to compare the effectiveness of different ad creatives.

Comparing ROAS across different campaigns, ad groups or ads is essential. But we can also use a rate-setting strategy based on tROAS (target ROAS / target ROAS). About it more below.

What is tROAS and how to use it?

One way to use ROAS to optimize a campaign is to set a target ROAS (tROAS). The target ROAS is the value we want to achieve in a campaign. When we set a tROAS, the ad system will try to display our ads to people who have the highest potential for conversion, while keeping ad spending at a level that achieves the tROAS. It’s worth noting that this is one strategy for maximizing the value of conversions, not the number of them.

When setting up sales campaigns, we should not immediately use the target ROAS. The first and primary strategy should be to maximize conversion value. Only after some time, when we reach a few dozen conversions, can we set a target ROAS. It should oscillate within the ROAS that our campaigns have achieved in the last 30 days. For example, if in the last 30 days we used the strategy of maximizing the value of conversions and achieved a ROAS of 4.85, we can set tROAS at 5.00. If the campaigns are well optimized (e.g., targeting, location, ad content) and the market is not oversaturated, then the target will be achievable. When this result is sustained for some time, we can increase tROAS by 15-20%. Repeated action from time to time is one of the basic methods to optimize campaigns using tROAS.

Note! We should not increase/decrease tROAS by leaps and bounds. A campaign that achieves a ROAS of 500% will not achieve a ROAS of 1000% if we increase its target ROAS. 

It is also worth noting that for campaigns using tROAS, it is the ratio of revenue to ad spend that will be most important to the algorithms. This may result in spending reductions (not spending the daily budget) just to make sure the target (tROAS) is met.

How to set tROAS in Google Ads?

As I mentioned above, target ROAS only applies to campaigns that aim to maximize conversion value. You will learn how to create such a campaign and what to keep in mind in one of our articles.

With such a campaign already in place, we go to its settings, and search for the “Budget and Rate Determination” field. This field contains two options, we are interested in the second one — “Rate setting”. Expanding this segment will show us the strategy (we should see “Maximize conversion value” here). Underneath, we check the box “Set target return on ad spend (optional)” and enter the target ROAS. 

When this is done, we save the settings and wait for the results.

How to set target ROAS on Facebook?

Similar to Google Ads, here too we will not apply tROAS to every campaign. We will only use it for campaigns that target sales. In addition, we must opt to use the “Advantage campaign budget” option. 

The target ROAS for a sales campaign on Facebook is set at the campaign configuration stage. In order to make this option visible, we need to enable the “Advantage campaign budget” option at the very bottom, and then expand the list of “Campaign bidding strategies” and select “ROAS target”. This will ensure that the campaign is aiming for a target return on ad spending.

Interestingly, we set Facebook’s tROAS value at the ad set level (not at the campaign level, as in Google Ads). To set the target ROAS, we need to find the “Conversion” panel at the ad set configuration level, and then enter the value we are interested in. 

It is worth noting the way the number is entered — in the case of Google Ads tROAS was given as a percentage, and here as a number between 0.001 and 1000.

Conversion value

The key thing when using a target ROAS strategy is to configure the conversion value appropriately. If the company is engaged in online sales (E-commerce), the conversion value should correspond to the value of products sold.

If we use Facebook, then all the configuration is done through Facebook’s Pixel or Conversion API. For Google Ads, we will use imported conversions from Google Analytics or events created from Google Tag Manager. Whichever option we choose, we need to be sure that conversions are counted correctly – it’s worth testing this before we decide to maximize conversion value.

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When it comes to Google, we can also use the strategy of maximizing the value of a conversion in case the conversion is not just a sale. In this case, we need to assign a specific value to the conversions created (form submission, link click, phone contact, etc.). It is based on this that Google will calculate the ROAS of the campaigns, even if we use tROAS. This is a much rarer approach, and specialists are more likely to use target CPA here, for example.

Summary

Promoting stores and services online is an integral part of today’s business. The two main channels of promotion: Google Ads and Facebook, are becoming key elements of many companies’ strategies. The key to success on these platforms is to achieve maximum return on investment, and one of the most important optimization metrics is ROAS — return on advertising spend.

ROAS measures the effectiveness of advertising campaigns by determining how much revenue each dollar spent on advertising generates. The higher the ROAS, the more effective the campaign. However, ROAS is not the only indicator to consider, as its value varies by industry and product margin.

Optimizing ads based on ROAS can be an effective tool for product campaigns. It is useful to divide products into campaigns according to different criteria, which allows you to evaluate their effectiveness.

Optimization can be a useful tool.

Not all campaign types will work well if you want to maximize ROAS. For example, in Google Ads, video campaigns or Discovery have different objectives than closing the sales funnel. Targeted ROAS is a good solution, for example, in Performance Max or Search campaigns (not in all cases).