Introduction to Paid Advertising KPIs and ROAS
2.71 Billion of us shop online, and if you’re reading this blog, you likely do too!
No, that's not an exaggeration. This means that 33% of humans alive use the internet to shop for our emergent needs. From your local Barney's to the shop you always hear about but never go to, an increasing number of DTC businesses understand the internet is an invaluable source to scale their brands nationally or even internationally because of the expanding market coverage and easier accessibility.
Businesses that sell directly to consumers are called DTC companies, meaning they sell directly to individuals rather than businesses. In the sense of e-commerce, 13% of all e-commerce companies in the USA are DTC brands.
However, while an increasing percentage of brands choose to ditch the middleman and market straight to their consumers, their profit margins average between 40-70%. When we look at this number, it's essential to realize that it can multiply with better advertising, which can capitalize on improved audience targeting or better creatives to generate more revenue at a fraction of the cost.
When we consider our paid advertising performance, one of the most important key performance indicators (KPIs) is the return on ad spend or ROAS. ROAS is the best measure of profitability for your paid advertising, and the ROAS formula is defined as the revenue generated from the ads divided by the total ad spend.
ROAS calculation can help summarize in numbers the profitability of your ad campaigns, with a higher ROAS indicating more profit. Numerically, the median ROAS on Google ads for June 2024 was 3.08, decreasing by 0.02 to 3.06 in August 2024. Meanwhile, the median ROAS on Facebook ads in August 2024 was 2.3.
ROAS Formula = Total Revenue Generated from ads / Total Ad Spend.
ROAS impacts and is influenced by your paid ad strategy depending on your initial benchmarks, how long your campaign is running, ad creative performance, and historical ad performance.
Corporate marketers are often faced with the challenge of deciding how to improve ad performance, how to create organic growth from ads, and how to improve the overall efficiency and speed of ad creation and launching while answering critical stakeholders. Accordingly, the efficacy of the ad campaign is better represented by its returns.
Why ROAS Matters More Than Ever in 2024
Here's the deal: AI Marketing has successfully infiltrated the e-commerce industry. According to a now infamous 2024 report by Mailchimp—a widespread mail automation and delivery SaaS (Software as a Service)—88% of marketers believe that their organization must increase the use of automation to stay competitive in the ever-challenging market.
There are many popular interpretations as to why AI is necessary; however, they boil down to three reasons:
AI Marketing Automation Impact on ROAS
The most common of these three types is AI marketing automation, which is when DTC businesses use AI to automate parts of the marketing process.
There are many different ways that automation occurs in digital marketing. An AI website chatting service such as AI marketing automation can also power your paid advertising in many ways, ranging from automated AI audience selection to automated bid control, as is used by Google in their Smart bidding function that many e-commerce companies today use to power their marketing.
Most importantly, AI automation is one of the best ways to improve your ROAS in 2024. The reason is that it can improve your CTR, CPA, CPR, and ROAS.
, and easy campaign management. Facebook Ads integration and other
advertising keywords like CTR, CPA, CPR, and ROAS underline the platform’s
focus on boosting ad performance and cost efficiency.)
Think of it this way: with automated AI audience selection, artificial intelligence selects the most likely-to-convert customers from a larger pool of website visitors and then directs your paid marketing medium, such as Google Ads and Facebook Ads, to target only the selected audience via custom audience selection.
By doing so, AI can create more efficient ad campaigns that will likely result in higher returns, i.e., Higher ROAS.
Generative AI Marketing Impact on ROAS (AI Marketing Generation)
This is where things get spicy! Generative AI Marketing uses AI to create content for social media or paid marketing sources.
From your website banners to the very ads you click on, you can make all of them using AI—with varying levels of success. While aligning your branding message and imaging with Generative AI purposes might be hard, we developed the perfect solution to help! But more on that later.
Generative AI models use image processing techniques to create click-worthy content or, more specifically, social listening, generating custom product descriptions or chatbot utilization. A famous example is Tidio, which uses AI to automate the chatting service on e-commerce and B2B websites. While generative AI has risks, it can allow for fast paid ad creation, recommending alternative products, and much more!
Especially for e-commerce companies with an extensive catalog of products while promising higher clicks and more efficiency.
A study published by the Boston group in April 2023 focused on the impact of Generative AI on the future of business, and the outlook seems optimistic! 70% of respondents said that they use a form of generative AI in the workforce, and 84% of CMOs said they plan to launch a product enabled by generative AI technology.
AI Marketing Personalization Impact on ROAS
Historically, AI marketing personalization has been a use case for Generative AI and automative AI models; however, in AI marketing, personalization has such a comprehensive set of use cases that it deserves to be its topic.
Cross Channel AI Personalization is the cornerstone of cross-channel marketing that adopts a user-centric model, i.e., the user is the center of the marketing funnel. It is targeted through multiple touchpoints using the same messaging.
Think of it this way: you open your Instagram account to find an attractive ad through the e-commerce site you recently purchased from, then wake up the next day to find an SMS and email with the same message you saw on Instagram.
When companies do this form of AI Personalization, it results in hyper-targeting, which can massively increase the returns of e-commerce. Personalization with AI in marketing can increase retargeting and new user ROAS performance.
Look into mobile versus Desktop marketing with this blog.
What ROAS Tells You About Your Ad Performance?
I mentioned earlier the ROAS formula. However, it can get tricky to calculate the total ad spend and the revenue generated due to attribution problems, especially when considering cross-channel performance.
In essence, ad performance attribution automation means automating the data collection of what sales happened and where they were generated.
These services can contribute to accurate results when calculating the ROAS of your entire marketing channel.
However, for single-channel implementation, many technologies, such as the AI Ads reporter AI Ads, can automate ad performance metric collection and present them in easy-to-understand tables that can power your decision-making on the profitability of that channel.
Since 70% of the e-commerce ad budget goes towards using paid advertising, the efficacy of paid marketing can majorly determine and decide the next step of e-commerce marketing. Here are three considerations to take in mind while calculating ROAS:
- Type of Attribution Model used in calculating ROAS: From last-click attribution models that attribute the sale to the final touchpoint to time decay attribution models that emphasize touchpoints near the end of the customer journey, the different types of attribution models can drastically change the way that you see your returns. We recommend the seven-day attribution model since it most accurately represents the conversion value for the ad campaign.
- Conversion Tracking: One consideration for conversion tracking to calculate ROAS properly is multiple purchases per customer since the conversion value calculates ROAS, not the total purchase value.
- Time Frame of Ad Campaign: While it's great to celebrate the interim success of an ad campaign, it's also important to consider your ad campaign's lifetime success and calculate the Profit on Ad Spend or POAS of your ads to better plan for the next steps.
- Type of Ad Campaign: The ad campaign you launch can majorly impact your ROAS due to the different campaign objectives you use and the target audience and intention. For instance, looking for new customers with new sales might have a lower ROAS than retargeting campaigns with the sales objective.
Evaluating ROAS in DTC Advertising Campaigns
In DTC advertising, figuring out ROAS (Return on Ad Spend) is critical to measuring your campaigns’ performance. Knowing how to check advertising costs helps ensure your online marketing plans bring in good returns. Begin by looking at your ad cost formula across platforms like Google Ads and Facebook Ads. Keeping an eye on ROAS numbers will help you spot the best tactics and zero in on what boosts sales.
Breaking Down ROAS by Channels: Google Ads vs. Facebook Ads
DTC companies see different ROAS metrics on various advertising platforms. Comparing the ROAS formula between Google Ads and Facebook Ads can help you decide where to put your money. For instance, the ROAS formula on Facebook might be unique because of its special ad formats and ways to target audiences. Determining which ROAS metrics work best on each platform can improve your overall ad strategy and get better results.
Targeting the Right Audience: Maximizing Your ROAS in E-commerce
One of the top methods to boost your ROAS in e-commerce involves improving your audience targeting. If you advertise on Amazon or use lookalike audiences on Facebook, tweaking your campaigns based on audience insights can increase your returns. Knowing what ROAS stands for on each platform will also help you customize your content and offers, leading to improved customer engagement and higher ROAS metrics.
Long-Term ROAS Strategy for DTC Brands
A sustainable ROAS strategy is crucial for DTC brands aiming for long-term growth. Combine quick-win tactics, like tweaking your ROAS calculation formula, with big-picture plans to boost your brand's overall digital marketing presence. Remember to check advertising spending and fine-tune your campaigns based on their performance to ensure you're hitting your target ROAS formula. Staying on top of what's new in the industry and adapting your game plan will also help to keep your return on ad spend in the green.
Combining ROAS with Other Metrics (CAC, MER, CPA, CPM)
Now that we have extensively covered the factors affecting the returns of an ad campaign let's examine the relationship between returns and other key metrics. In essence, ROAS isn't the only metric to consider while looking at the efficacy of an ad campaign.
ROAS and CAC (Customer Acquisition Cost)
The Customer Acquisition cost, or CAC, represents the amount of money you spend to win a single customer and is one of the key metrics that can influence the ad spend and, accordingly, the scale of ad campaigns.
While the CAC can impact the decision-making regarding where to allocate your ad budget for the best results, returns can provide a summarizing factor to summarize the ad campaign performance results. ROAS and CAC can effectively represent an ad campaign's cost and efficiency.
ROAS and MER
Marketing Efficiency Ratio or MER and ROAS are crucial when considering your paid marketing performance. MER evaluates the total marketing efforts across all ad campaigns on all platforms and divides them by the total marketing expenses, which can include Facebook ads expenses, Google ads expenses, email marketing expenses, and much more.
The critical difference between ROAS and MER is that while ROAS primarily tracks short-term success in single ad campaigns, MER measures long-term results across all marketing channels numerically. There are some slight advantages and disadvantages to looking at MER and ROAS, respectively.
Advantages of MER over ROAS:
Since we discussed earlier that the main difference between MER and ROAS is the scale and time frame it considers, MER can provide a more comprehensive numerical value to the overall efficiency of the company's marketing efforts. MER can also help provide a faster assessment for investment purposes.
Disadvantages of MER over ROAS:
Since ROAS considers individual ad campaigns, MER will almost always be slower to adjust to externalities affecting the ad performance. Also, since MER considers the entire company's marketing strategy, MER can provide a different level of granular detail needed for ad campaign management.
ROAS and CPA (Cost Per Action) and CPM (Cost Per Mille)
ROAS and CPA, along with CPM, are the main three metrics digital marketers use when running and optimizing ad campaigns.
Whereas ROAS provides a numerical representation of ad performance results, CPA helps inform the marketer about the different factors affecting the ad performance.
The critical difference between ROAS and CPA is that CPA measures how much it costs to achieve the desired outcome (e.g., make a sale, sign up, form fill, etc.). On the other hand, CPM represents the cost of showing the ad to 1,000 people.
Case Studies of Improving ROAS Using AI Advertising
Case Study 1: Lacoste Finds Remarketing Bliss With AI Ads
Lacoste, a globally recognized fashion brand, wanted to improve their ad campaign performance. Their traditional marketing campaigns generated impressions and clicks, but Lacoste believed their returns could be better. They wanted a way to target only the best website visitors, especially during high-stakes shopping seasons like the summer sales.
Solution:
Using AI Ads's AI Audience with AI Remarketing, Lacoste could fine-tune its targeting strategy by focusing on predictive customer behavior. AI Ads analyzed the website and app data to identify critical traits among the highest-converting customers.
Combining highly targeted audiences and automatic AI Optimization ensured Lacoste's ads reached the right people and resonated with them more deeply.
Results:
Within three months, Lacoste saw a 90% return increase. The AI Audience strategy significantly reduced wasted ad spend by eliminating low-performing segments.
Lacoste also reported a 56% decrease in cost per acquisition (CPA), proving that AI advertising improves ad performance and enhances overall marketing efficiency.
Case Study 2: Maximizing Sales with Chakra's Summer Campaign
Chakra, a home textile brand, was gearing up for its summer campaign—a crucial period for driving sales in their industry. However, past campaigns had struggled with converting people who came to the website but didn’t convert into actual sales through social media ads. Chakra needed a solution to draw visitors to their site and guide them through the entire customer journey, from awareness to purchase.
Solution:
AI Ads's AI Remarketing allowed Chakra to segment its audience based on its website behavior and predicted buying intent. Instead of treating all visitors the same, the AI could create the best audience to power their remarketing.
Results:
In Chakra’s A/B test, the results of the AI Audience saw a substantial returns uplift of 2x higher than Add-to-cart audiences, demonstrating that AI can turn seasonal campaigns into year-long revenue drivers.
Chakra also experienced a 5.4% Clickthrough Rate as the AI Audience ensured that the ads were aligned with customer expectations, making the shopping experience more cohesive and enjoyable.
Conclusion
ROAS is a key performance metric in evaluating paid ad campaigns. At the same time, many externalities can impact the ad campaign and can effectively communicate your ad campaign's efficiency and guide the following steps.
However, in today's AI-powered environment, ROAS can be supplemented with other vital metrics, such as CPA and MER, and enhanced using AI marketing automation,
generation, and personalization. Nevertheless, AI can help your returns through audience targeting automation, automatic ad creative generation, and personalized content creation.
