Should I focus on increasing ROAS or Increasing my ad budget?
How to navigate the tradeoff for maximizing ad spend vs ROAS to boost your profits.
As a business owner, determining when to increase your marketing spend on Facebook, Instagram and Google can be difficult. Do you increase your budget and sacrifice return on ad spend (ROAS), or increase ROAS and lower your budget? Most business owners don’t understand that there is a tradeoff between the two; and the ultimate question becomes... Should I care more about a higher ROAS right now and increase PROFIT MARGINS, or increasing sales VOLUME to grow my monthly sales faster? Which option will put more money in my bank account? This is a difficult question because the answer is unique-to-you. You need to understand how YOUR business responds to this tradeoff to maximize your profitability and growth. In some instances a higher ROAS and slower growth can mean more cash in your bank account, while in other cases faster growth and lower ROAS can mean more cash in your bank account. Whatever path you choose, be it a higher ROAS or Faster Growth, the goal and hope is to end up in the same spot. It all just comes down to how fast you want (or need) to get there. Based on your growth needs, sometimes slow and steady is needed for cash flow, other times you may need to filter as many customers into your funnel as you can as fast as you can to beat the competition.
What should you do?
Deciding whether to focus on increasing ROAS or increasing marketing spend depends on several factors; however, the most important factors to consider are two key business goals: 1) What is your monthly/annual revenue goal, and… 2) What is your net profit margin/net income goal? Setting and focusing on these two goals allows you to make an intentional decision on spend and target ROAS. These goals will vary based on the stage of business you're in, and on what you're trying to accomplish at that stage. Businesses that are spending over $10k/month on ads and already have sales momentum can go either way and reach businesses goals. A focus on higher ROAS with lower spend usually means slow and steady growth. While a focus on increasing spend with a lower (but still profitable) ROAS typically leads to faster growth.
The Tradeoff Between The Two
This is important… When discussing the tradeoff between marketing spend and ROAS, we are also indirectly addressing another important tradeoff between total revenue growth and profitability. Marketing spend influences your total revenue and ROAS heavily influences your profitability.
The more you spend, the more you make, the higher your ROI, the more you net profit; however, this relationship is NOT always true! Every business encounters an opportunity to increase ad spend, allowing a decrease in ROAS, and still see growth in revenue AND profitability. This is why it’s essential to understand the tradeoff relationship and take advantage of the opportunity that every business has to maximize profitability.
How To Figure It Out
It’s not easy trying to figure this out, so we created THIS nifty little ROAS vs Ad Spend Calculator spreadsheet to help! You can access it below! Plug your numbers in and adjust spend and ROAS to see how it will impact your profitability and revenue growth. This is the easiest way to see how your marketing spend and ROAS impacts your business growth and profitability. If you want to talk more about this, and how it looks for your business. Hit us up! We’ll take a peek at your account, ask a few questions and set some goals based on your unique-to-your business needs.
Use The ROAS vs AD Spend Calculator!
Copy our ROAS vs AD Spend Calculator to your Google Drive, and discover what your business needs right now!
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