Low ROAS? Here’s Why It’s Happening & How to Solve It – New update 2024
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You set up an ad campaign in the hopes of generating as many clicks as possible to increase your traffic volume. After running the campaign for a few days, you notice that your return on ad spend (ROAS) is too low to justify. In other words, the revenue generated from your campaign is equal to or less than what you spent on it. Sooner or later, you’ll have to decide whether to end your campaign or make a drastic change to turn the situation around.
Why your return on ad spend is low
The secret behind low ROAS is in the formula. To calculate your return on ad spend, you need to know what your campaign cost and how much revenue it produced. If it cost too much or didn’t produce enough revenue, your returns may be negligible.
Let’s say your cost-per-click was $1.96. If you converted 4% of your paid traffic, it would take you 25 clicks to get a single conversion. In this scenario, each conversion would cost you $49. That means your average order value—the average amount of money your customers spend on an order—would need to be over $49 to make your campaign worthwhile. (Ideally, it would be three, four, or five times that.)
Three metrics help you calculate ROAS:
- Your cost-per-click
- Your conversion rate
- Your average order value
The same three metrics can reveal why your ROAS is low.
1. Your cost-per-click is too high
If you don’t follow online advertising best practices, your cost-per-click can rise exponentially. And that’s a big problem for your bottom line. The math is simple: The higher your costs, the lower your return. It thus makes sense to first optimize the costs you incur to run your advertising campaign.
In order to reduce your cost-per-click, you first need to figure out why it’s so high. Maybe there’s high competition for the short-tail keywords you’ve selected. Or, you’re simply bidding too high for your target ad position. Or, perhaps your Quality Score is lower than you’d like. Once you’ve identified the problem, you can start working on a solution.
One of the fundamental factors determining the cost of a Google Ad campaign is your Quality Score, which measures your ads’ quality and relevance for the keywords you target. A high Quality Score will lower your cost-per-click and increase your impressions. A low Quality Score, on the other hand, can cost you a 400% premium.
To achieve a higher Quality Score, you must improve your expected click-through rate, ad relevance, and landing page experience. To begin, try implementing these tactics:
- Increase your CTR: Use compelling ad copy that connects to the keyword’s intent. For example, ad groups that target keywords with commercial intent (e.g., “buy tennis shoes”) should use commercial copy (e.g., “Buy Now”).
- Optimize your landing page for every device: It should go without saying, but your web design must be responsive to adapt to every device and provide a better user experience.
- Match your ads with its keywords: Your ad and landing page copy must correlate to the keywords you bid on. Add the keyword your ad group targets in the ad headline, copy, and URL.
2. Your conversion rates are too low
When optimizing an ad campaign, advertisers tend to focus on getting more clicks. As a result, they neglect the landing page, which leads to what advertisers consider “natural” low conversion rates.
When you aim for average, average is what you get. The truth is, your conversion rates could be much higher.
To optimize your conversion rates, it’s key to follow digital advertising best practices. You have several options at your disposal:
To be perceived as relevant by consumers, it’s important to serve up personalized content that resonates with your target audience. Only then will you see optimal conversion rates.
Marketers who leverage personalization reap rewards. According to McKinsey & Company’s This Next in Personalization Report, 71% of consumers expect companies to deliver personalized interactions and 76% get frustrated when this doesn’t happen.
Match your ads with your landing pages
A common mistake when creating digital advertising campaigns lies in an exaggerated emphasis on driving clicks. This mentality leads to an over-optimization in the pre-ad-click stage and an under-optimization of the post-click stage, where conversions actually happen.
The truth is, your landing pages must meet the expectations you set in your ads. In other words, it’s important to have unique landing pages for every ad, as the messaging must follow through from the ad to the landing page to be effective.
Optimize your landing pages
Your landing page design defines your user experience and influences their behavior. Beyond having an aesthetically pleasing page, it’s important to design one that converts.
Enter conversion-centered design, which focuses on designing a website to elicit a specific action. This approach will maximize your conversion rates while fostering a good user experience.
3. Your average order value is too low
A high conversion rate can seem like a panacea for any marketer, but conversion rates are a vanity metric without analyzing their relation to profits.
Since ROAS measures an ad campaign’s revenue, you must link your advertising conversions with an average order value (AOV) that justifies your campaign’s costs.
Your digital advertising investment—the denominator in the ROAS formula—must be proportionally related to its potential revenue, unless your attribution model justifies a higher initial ad investment in the name of future profits. If that’s not the case, a high financial investment only makes sense when there’s a high AOV, and vice versa.
Therefore, when optimizing your ROAS, look at your AOV. If your conversion rate is average (based on your past performance and industry benchmarks), your AOV may explain your low ROAS. In that case, you can try the following tactics:
- Encourage upsells/cross-sells: Present related offers before and after your customer makes a purchase.
- Bundle your offers: Package several related offers, with each individual item discounted.
- Leverage email marketing: Segment your audiences based on their behavior and demographic data, and send automated campaigns to elicit recurring purchases.
Say goodbye to low ROAS with optimization
If your ad campaign costs too much or doesn’t produce enough revenue, your returns may be negligible. But it doesn’t have to stay that way. Instead of ending your campaign, take the time to optimize your cost-per-click, conversion rate, and average order value, and you’ll be rewarded with a higher ROAS.
Let Instapage help you create, launch, and optimize landing pages that generate higher advertising conversions. Find out how the #1 landing page platform for marketers can help you skyrocket conversions while decreasing your cost-per-click. Schedule an Instapage demo today.
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