What Is a Good ROI (Return On Investment)?
By Joe Kim, Founder of Frontside Consulting
“So, what is a good ROI (Return On Investment) to target for my paid media efforts?”
I’ve been working in digital marketing for over a decade and this is one of the most common questions I get when talking to someone relatively new to the world of paid media.
The quick answer? Whatever ROI makes you happy.
Blog over. Thanks for coming to my TED Talk.
The long answer? It depends on many factors, but this is how I think about ROI or ROAS (Return on Ad Spend). **Note that in paid media these terms are used interchangeably.**
What Is ROI/ROAS?
First, let’s look at how ROI/ROAS are defined:
ROI/ROAS is simply the total value of conversions divided by the total ad dollars spent.
As an example, if you ran a paid ads campaign that had an ad budget of $100 and that campaign yielded a total conversion value of $500, that’s a 5:1 ROI. Meaning for every $1 in ad spend you made $5 in sales.
Incremental Spending & Other Considerations
The chart below is a good explanation of how incremental spending into a particular channel or campaign typically works:
As you can imagine, there’s a core audience that resonates deeply with your brand or value proposition and you can find and target them immediately, ideally with the Battleship Method, and generate ROI straight away. Your first successful targeting of an audience or keyword intent will likely drive some great results, assuming that you’ve got everything you need on your site to have a solid conversion rate. It’s also why we at Frontside don’t work on a % of ad spend business model. Spending more doesn’t always mean an improvement in results and we want to make sure that our incentives are aligned with those of our clients.
The next group of users you target may also love your product or service, but maybe they’re not quite ready to sacrifice their firstborn for it like your first set of customers.
Another example more relevant to search may be Exact Match users → Phrase Match users →Broad Match users. Assuming you’ve got good keyword targeting, expanding the search intent and eventually letting Google figure out what you mean results in fewer and fewer relevant queries, as you run out of searches available to serve ads. Remember, the ad platform gets paid for spending your money, not for getting you sales.
For the most part, there’s always an exchange of conversion volume and ad spend. The more you spend, yes, you’ll typically generate more revenue, but at what cost? This is something that you, as the business owner, need to determine strategically. Also, this is something that can be flexible. Running high on inventory and need to move product? Lower your ROI expectations and drive ads harder. Running out of ad budget for the year? Raise your ROI constraints and use the remaining ad dollars more effectively.
Another consideration is what product or service you are selling. If it’s a digital product that has no inventory or incremental cost, you can drive nearly a 1:1 ROI and still be profitable. If you’re selling heavy construction equipment that only has a 20% margin, 5:1 ROI is the minimum necessary to keep things profitable at the unit-economics level (not considering other costs of doing business).
So what are some signs that you’re hitting that peak of marginal returns? There are a few metrics that are important to be aware of that might give you a signal. In Google Ads, an easy one is Search Impression Share, particularly if you’re keeping your keyword sets down to Exact Match. This will let you know when you’ve run out of search queries to match to. In Meta Ads, Frequency is something to keep an eye out for. At Frontside Consulting, we like to target a 1.5 Frequency on a 7-day lookback for prospecting audiences. This is for many e-commerce sites, so if you’re selling something with an extremely high AOV (Average Order Value) that requires a long consideration period, you may want to go higher. Regardless, keeping an eye on the Frequency of ad delivery gives you a sense of how much you’re pestering your customers with your ads. If you’d be annoyed at seeing the same set of ads more than 3 times in a week, your customers probably are too.
So here is a thorough non-answer to your question, but a way for you to consider coming up with your own target efficiency.
If you found this useful send us a message and we can work together to find a way to add value to your brand.
Thanks for coming to my TED Talk.
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