How Do Paid Ads Work? 3 Ways to Measure Their Effectiveness
While there are many ways of building organic traffic through cost-effective inbound strategies such as blogging and social media posting, businesses looking for faster growth may require the reach and boosting power of paid ads.
This blog looks at the question of what are paid ads, how they work, and how the measures of ROI, ROMI, and ROAS can help effectively measure ad campaigns.
What Are Paid Ads?
By investing money in a search engine, social media platform, or website, a company can place ads targeted to a specific demographic or customer base. These may be search ads, social media ads, video ads, or other forms of advertising.
Paid ads are often considered a supplement to SEO and organic marketing strategies or work in conjunction with these efforts.
How Do They Work?
While it may initially seem complicated, the answer to how do paid ads work is relatively straightforward.
Advertisers will bid on ad placement on the selected search platform or social media page, and the higher the bid, the more likely it is that the ad will be shown to the searcher. For example, if a customer searches for your product using Google, an 'auction' will trigger in the Google algorithm factoring in your bid amount, relevancy, and user intention before showing an ad.
Due to this, businesses must determine their advertising spend during the campaign and adjust accordingly. The payment structure follows the pay-per-click (PPC) method in which a business will pay the platform each time their ads have been clicked.
Because of the competitive nature of paid advertising, businesses must determine the optimal platform for their needs and employ advanced SEO techniques to pick the right keywords to bid on.
Top 3 Ways to Measure a Paid Ad Campaign
There is no one way to measure the success rate of paid search ads. Instead, marketers rely on several calculations to provide some indication of performance.
1. Return on Investment (ROI)
A classic measure for determining the effectiveness of a paid campaign is measuring the ROI.
(sales growth - the cost of ads) / cost of ads x 100% = ROI
For example, if a business spends $2,500 on a paid ad campaign and generates $10,000 in revenue, then the formula will apply as follows:
($10,000- $2,500) / $2,500 x 100% = 300%
For every dollar spent in the ad campaign, $3 was generated back.
When measuring ROI, keep in mind the following points:
First, the formula above assumes all revenue can be attributed to the ad campaign, which will likely not happen if you run organic and additional paid ad campaigns.
An ad may influence customers to purchase much further down the customer journey outside the measurable scope of the ad campaign.
ROI should be measured within the context of the entire marketing framework
For a more accurate ROI on your ad spend alone, you should consider factoring in other sources of revenue that you have data points on.
For example, in the calculation above, if you knew you did $1,000 due to an email campaign, adjust the formula accordingly.
(sales growth - email sales - the cost of ads) / cost of ads x 100%
($10,000 - 1,000 - 2,500) / 2,500 x 100 = 260%
As you can see, ROI can be a challenging measure in isolation, and factors such as seasonality, market shifts, and other marketing channels can impact an accurate representation. Therefore, ROI can serve as a great baseline; however, it must be considered within the context of other marketing measures.
2. Return on Ad Spend (ROAS)
Return on Ad Spend is a valuable measure for marketers as it shows the return for every dollar spent on an ad. It's a more specific measure used to determine the performance and effectiveness of an ad campaign and can help with decision-making and structuring other ad campaigns.
The formula is a nice easy one. As marketers, the less mathematics, the better, as far as we're concerned!
You can determine ROAS with the following formula:
Revenue / advertising costs = ROAS
A campaign that cost $1,000 and generated $5,000 would look like the following.
$5,000 / $1,000 = $5
This means for every dollar spent on advertising, $5 was generated.
When measuring ROAS, determine your profit margins and benchmark, and set a desirable ROAS to measure against.
3. Return on Marketing Investment (ROMI)
Return on marketing investment is a formula like doing a health check on your entire marketing efforts or campaign. ROMI calculates the profitability or loss of a specific invested amount.
ROMI can be calculated with the following formula:
(marketing revenue - marketing expenses) / marketing expenditures x 100 = ROMI
So, let's say a company spends $10,000 on a marketing campaign and generates $8,000 in revenue.
(8,000 - 10,000) / 10,000 x100 = -20
This indicates that the ROMI for this campaign is -0.2, which means the company lost 20 cents for every dollar spent on marketing.
In this case, the campaign could have been more effective, and the hypothetical company must review its marketing tactics and internal marketing processes.
How Do Paid Ads Work? Learn More With Our Experts
Paid advertising campaigns sit firmly at the intersection of art, creativity, mathematics, and consumer psychology. Building, monitoring, and ensuring profitability from a paid ads campaign is a tough gig. Without expert help, businesses may be wasting money unnecessarily and not extracting the actual value of paid ad campaigns.
That's why top businesses are partnering with a digital marketing specialist with a deep knowledge of paid advertising. The Geekly Media marketing strategists are ready to take charge of your paid ads campaign, ensuring you get maximum bang for your buck. Speak to a Geek to learn how we can help!