Before we proceed in answering this question, we first have to define what ROAS is.
”ROAS stands for Return On Ad Spent. It displays the money you get back for each euro you spent. It is a ratio and it is equal to the division of advertising revenue to advertising cost.
In other words, if you have invested €5 in an advertising campaign and this campaign brings back to you a revenue of €10, then the campaign’s ROAS would be €10 / €5 = 2 or 2.0X or 200% (all these are simply different formats of displaying the same value).
So if your campaign displays a ROAS of 300% or 3.0X, it means that for €1 spent you get back €3. If your campaign displays a ROAS of 70% or 0.7X, it means that for €1 spent you get €0.7 in return.
If you get the point of this as a principle, you can quickly understand that a ROAS above 1.0X means profit for your business, while a ROAS below 1.0X means loss.
Most clients expect that the more the advertising budget increases, the more the return they gain. Theoretically, this should be the case for a healthy business, since increasing the budget would lead to increasing revenue which would bring profit to your business.
In reality though revenue does not always increase proportionally or exponentially as budget increases.
Understand how metrics fluctuate in time
A proportional relationship between cost and revenue would appear like this:
- A cost of €1 accompanied with a revenue of €10
- A cost of €2 accompanied with a revenue of €20
- A cost of €300 accompanied with a revenue of €3,000
Do you identify the pattern in this case? Every aforementioned pair of cost-revenue has a stable (constant) relationship. Each revenue value comes from its corresponding cost value multiplied by a constant number, here 10. This can be validated from the following check:
- €10 / €1 = 10
- €20 / €2 = 10
- €300 / €3 = 10
So if a campaign’s cost and revenue evolve in time proportionally and the constant number of their relationship is above 1 then your campaign will be profitable. Do you see the trick here? The constant number is actually ROAS.
If we put the example values in a graph and connect the dots, we observe that the graph is linear (straight line without any curve).
In this case cost and revenue do not evolve in time proportionally, but one of the two rather “rushes” to increase (or decrease). Check it out below:
- A cost of €1 accompanied with a revenue of €10
- A cost of €2 accompanied with a revenue of €30
- A cost of €3 accompanied with a revenue of €80
Now you can imagine how we will proceed. Let’s check further if we got a constant:
- €10 / €1 = 10
- €30 / €2 = 15
- €80 / €3 = 26.7
Wow! While the cost increases by €1 at each step, the revenue “rushes” to “climb” higher and higher. Therefore we do not have a constant number, but rather a ROAS that is constantly increasing (sic).
If we put the example values in a graph and connect the dots, we observe that the graph is exponential (line with a steep curve).
Back to reality
Now that you have understood these basic mathematical concepts we need to emphasize that in the real world apart from proportional/exponential growth there can also be proportional/exponential decay.
So related metrics, such as cost & revenue, can display different behavior from time to time, i.e. being proportional one month and exponential in the next month, displaying growth first and decay afterwards and so it goes. This behavior depends on multiple complex factors (market changes, competition, price changes, customer needs, etc.) a lot of which we cannot monitor, have an impact on or even predict accurately.
Typical digital marketing ROAS behavior
As we said before, ROAS is the outcome of two other metrics, namely cost & revenue, which are related to each other. In the digital marketing world, whether we are talking about Google Ads ROAS or Facebook Ads ROAS, there is usually a typical pattern among time.
When a campaign starts, ROAS is zero. As days go by ROAS is increasing exponentially as budget increases (provided the campaign has potential; we will explain this later on). At some point it reaches a top (we like to call it break even point) and then the downfall starts. Increasing further the budget (and only the budget, without making any other change to this campaign) will simply cause a further decrease in ROAS.
Why does ROAS behave like this?
When a new campaign is launched, we have an ad in place, an audience targeted and a budget to start.
We always study the prospective campaign’s settings in order to be sure that it has potential. However, do not forget that your competitors likely do the same. So when launched, the campaign has a fresh audience to deliver its ad.
The initial budget helps the campaign deliver the ad many times to the targeted audience throughout a certain time range. As time goes by, the campaign proves profitable and we invest more and more budget to boost it in order to reach more and more people and show the ad as frequently as possible.
Now here comes the tricky part. This situation cannot last forever. If it could, then we would infinitely increase budget and we would always have profits (we AND our competitors; do not forget that simultaneously with our ads, their ads are also delivered. In this ideal world, you would not even need us, the marketing specialists. You would just run your campaigns all alone.
In the real world a campaign that is constantly boosted with budget is deterministically led to saturation. The targeted audience will get bored with your ad, maybe most of the people in this audience will have already purchased your product or service, maybe your product or service is seasonal, etc. So if you keep everything, but the budget, constant (a term called in economics ceteris paribus – changing only one factor and keeping everything else the same), the time will come when the campaign’s ROAS will reach that sweet break event point that we talked about. In other words your ultimate goal should be to quickly “spread the word” for your product/service, successfully catch up and overthrow your competitors’ advertising efforts and take as much as possible from the targeted audience until it saturates.
Can we do something to “heal” a campaign’s declining ROAS?
Once a campaign is saturated by any means and ROAS hurtfully keeps declining, the only way to “heal” it is to refresh it.
This may involve one of the following:
- Change the audience targeting
- Change the ad’s elements (banner, text, landing page URL)
- Change the bidding strategy
- Change the ad schedule (deliver ads in the most profitable time slots)
Or sometimes simply pause the campaign and move on to drafting a new one from scratch as we do when the campaign’s concept is seasonal (usually there is no logic in continuing a summer campaign during winter).
How much time is needed for a campaign to thrive?
This depends on several factors like the business model, the available budget and bidding, the reach of the targeted audience (how wide or narrow it is) and others. There is no fixed threshold, but it is suggested that a campaign should run at least for 1 or 2 weeks before making any changes in its settings or pausing it.
To sum up, when you observe a campaign’s ROAS to decline, you have to think carefully why it does so.
It is true that sometimes campaigns fail from the very start. It might be due to wrong targeting or a mistake in the campaign’s settings. It might be due to the product/service itself that is not attractive to your targeted audience. It might be due to low brand awareness (the targeted audience does not recognize your business’ brand name and does not trust it in order to proceed in a conversion). It might be due to UI/UX issues (your website is badly designed, providing your customers an undesirable user journey). It might be due to all the aforementioned facts being true altogether. In this case, it is our duty (along with your feedback) to identify the problem and come up with a handy solution.
In other instances, none of the above holds and the campaign proves profitable for a certain period of time until it reaches its break even point and its ROAS starts declining. In this case, it is our duty to hit the pause button, congratulate ourselves for the effort and the profits we gained and move on to coming up with the next prospective campaign that will further grow your business.
All in all, always remember the bright side of paid advertising, meaning that none of your budget is spent worthlessly, because if ad targeting is set to the right audience, every euro spent makes your business brand more popular to the world.