How to optimize your return on advertising spend (ROAS)?

How to optimize your ROAS

Today, let's explore how marketing teams can maximize their Return on Advertising Spend (ROAS) by making adjustments to their bidding strategy based on a given ROAS. First, we'll examine what a target ROAS strategy entails. Then, we'll review different scenarios that may arise in pursuit of the ideal ROAS and how to optimize it to maximize returns on digital media purchases.

What is ROAS?

ROAS, or Return On Ad Spend, is a measure that informs marketing teams how much revenue their advertising investments have generated.

How is it calculated?

ROAS = (Revenue ÷ Advertising Spend) x 100

For example, if you spend €500 on a campaign and it generates €800 in revenue, your ROAS = (800/500) x 100, which equals 160%.

What is Target ROAS?

Target ROAS is an automated bidding strategy offered by many programmatic advertising platforms. As the name suggests, it optimizes campaigns to achieve a predefined target ROAS value.

For example, if you're using a target ROAS strategy and set a value of 200%, platforms will automatically optimize bids so that your ads are primarily displayed in locations likely to generate €2 in revenue for every €1 spent on advertising.

How is the value of Target ROAS determined?

The goal of a target ROAS bidding strategy is to maximize revenue while adhering to the campaign budget. Typically, the target ROAS is set based on known parameters of the business, including historical data indicating the amount of advertising spend needed to ensure a profit.

However, determining a target ROAS value and letting algorithms ensure performance isn't enough; it's also about implementing various optimizations that lead to higher ROAS. It's crucial to determine which target ROAS allows for the most profitability. However, the ROAS metric alone doesn't guarantee performance up to objectives. Achieving the target ROAS doesn't necessarily guarantee maximum profitability, as other parameters need to be considered. In many cases, a higher target ROAS may yield similar revenue results with lower advertising spend. Conversely, a lower target ROAS may lead to increased revenue with similar spending.

To identify if performance is below its potential, you need to consider the target ROAS value, the revenue generated, and the advertising spend to achieve it. Finally, observe the relationships between these components throughout the campaign and monitor whether the target ROAS is too low, too high, or just right.

“To identify if performance is below its potential, you need to consider the target ROAS value, the revenue generated, and the advertising spend to achieve it.”

4 possible scenarios for optimizing ROAS

First scenario, revenue decreases and advertising spend decreases while ROAS increases towards its target value.

Let's take an example with a target ROAS set at 400%. Initially, this campaign generated €200 in revenue with advertising spend of €80, meaning the ROAS was 250%. As the campaign progresses, with the target ROAS still at 400%, it now generates only €100 in revenue with a spend of €30, resulting in a ROAS of 333%.

In this scenario, the target ROAS is too high. The optimization strategy mechanically reduces spending to reach a potentially unattainable ROAS with an "acceptable" revenue volume.

The ROAS approaches the target, but at the expense of revenue, as the target ROAS is too high, leading to a decrease in advertising spend by platform algorithms to achieve the set ROAS. Here, it's advisable to reduce the target ROAS while keeping an eye on performance.

Second scenario, revenue remains constant while advertising spend increases and the target ROAS decreases towards its target value.

Using our example again, with a target ROAS set at 400%. Initially, this campaign generated €400 in revenue with advertising spend of €80, resulting in a ROAS of 500%. However, since the target ROAS is below 500%, advertising spend is reallocated to deliver more without increasing revenue. Thus, the campaign generates the same revenue, €400, while advertising spend now amounts to €90, resulting in a ROAS decreasing from 500% to 444%, approaching the target ROAS (400%).

In this scenario, the target ROAS is probably too low. Achieving the target ROAS isn't an end in itself, as depending on the distribution platforms, advertising spend increases without necessarily improving the profitability of your digital media purchases.

In this new scenario, revenue and advertising spend increase while the ROAS remains constant.

The target ROAS is still 400%. The campaign generates €400 in revenue with advertising spend of €100 for a ROAS of 400%. As the campaign progresses, €200 in advertising spend generates €800. The ROAS remains unchanged, but more revenue has been generated.

In this case, the campaign's evolution is favorable; although spending increases, profitability is higher. Two options are possible to maintain revenue growth: either maintain the target ROAS as long as revenue and advertising spend stabilize, or if the goal is to maintain revenue levels while spending more efficiently, increase the target ROAS and monitor revenue stabilization.

In this last scenario, revenue, advertising spend, and ROAS are constant.

The target ROAS remains 400%. The campaign generates €400 in revenue with advertising spend of €100 for a ROAS of 400%. As the campaign progresses, these three parameters remain the same. The goals are achieved, but adjustments can be made to increase profitability. Here, it's not clear if the limits are reached or if further optimizations are possible, but two options remain valid:

• Decrease the target ROAS to generate more available revenue. It's possible to generate more revenue with a lower ROAS.
• Increase the target ROAS to optimize advertising spend. There may be some inefficiency in spending, and increasing the target ROAS could eliminate inefficient spending.

How to optimize your ROAS with certainty?

Fine-tuning ROAS is crucial when it comes to generating revenue through digital media purchases; it requires time, learning, and some reflection. This search for the optimum can only be done with precise and real-time data from Ad platforms to understand general trends and make necessary adjustments.

This is why we provide marketing teams with a comprehensive suite of features within our Saas platform, The Programmatic Platform, including an automated reporting tool for collecting and representing distribution data, as well as the ability to effectively intervene on performance (budgets, KPIs) through a cross-platform optimization tool. Optimizing your ROAS or any other.