What is ROAS (Return on Ad Spend)?
ROAS is an essential metric that helps companies gain insights into their advertising strategy. Learn your approach’s effectiveness by calculating ROAS and using those details to adjust your marketing efforts to propel better results.
Definition of ROAS
ROAS (Return on Ad Spend) is the calculation of revenue earned for advertising spend. The higher the ROAS, the better performing the marketing program.
The formula for finding ROAS is: (Revenue / Ad Spend)
This metric is crucial for creating effective advertising campaigns and allowing marketing teams and executives to understand which marketing strategies are effective for their brand.
Understanding ROAS allows you to get the figure for return on investment for each dollar spent, making it easier to judge whether those funds produce adequate results for a particular strategy or campaign.
Why is ROAS important?
ROAS metrics help marketing teams gain insights and propel business decisions to increase or decrease spending on specific advertising projects. Knowing where to adjust a budget helps enforce more effective campaigns, redirect funding to that area, and reduce funding or halt strategies that underperform.
The higher your ROAS, the more profits you’re generating. Calculating ROAS gives you a better look at the big picture rather than specific metrics. ROAS is also beneficial because you can use it to track the information at the landing page level. It’s also helpful for advertisers to track as a keyword, advertisement, or by audience.
It’s also essential to know your ROAS because some campaigns are more effective for some brands or industries than others. You can’t take a universal approach to advertising because every brand’s voice is unique and has a particular image.
For example, the average Google ROAS is approximately 2 to 4, which is $2 to $4 in revenue for each dollar spent. An average ROAS of two is acceptable, and a four is outstanding.
How to calculate ROAS
The method for calculating ROAS is straightforward and relatively simple.
- Divide the amount of your revenue from an ad campaign by the cost of the campaign to generate a ratio.
For example, if you spend $2000 on advertising and your revenue is $4000, you’ll arrive at a ratio of 2:1 or twice your initial investment in revenue. This can also be expressed as a $2 ROAS.
The most accurate method for generating these metrics is to have access to analytics or data that provides an accurate up-to-minute figure. Take those figures and apply the ROAS calculation formula to discover whether your brand is moving towards its goals with each marketing strategy.
When calculating what is ROAS, there are some key terms to know and understand. They include the following.
Touchpoint attribution (first, multi, last)
It’s important to note the ROAS calculation may vary depending on the model used. Some use a first-touch attribution, while others use a last-touch or multi-touch attribution.
This term means the point at which a customer converts—first ad, last ad, or all ads considered. Be aware that the figures are also generally different for each industry. Knowing these touchpoints helps determine how effective your marketing campaign performs.
KPI is Key Performance Indicator. ROAS is a KPI that allows teams to understand how well their marketing strategy is working for specific elements of a campaign.
A positive ROAS is when an ad is generating revenue. Calculating ROAS helps you determine whether you’re meeting goals and reaching your audience.
A negative ROAS is when your advertising costs more than you’re generating in revenue. When you have a negative ROAS, that means it’s time to reassess your approach and stop following the marketing advertising strategy that’s in place.
Break-even ROAS is when you manage to cover the cost of advertising, but you haven’t managed to create a profit from it yet.
This term refers to using your ROAS early into your marketing campaign. If you use information from your first few days or weeks of a campaign, they can offer some insight into how the rest of the campaign may flow.
ROI compared to ROAS
These two metrics help you understand marketing strategy profitability. However, ROI is the Return on Investment. This metric allows you to see the total monetary return for the money invested in advertising. The ROAS metric provides you with the monetary return for each advertisement.
CTR compared to ROAS
The click-through rate, or CTR, provides a brand with insights related to advertisement visibility and views. The click-through rate allows marketing teams to understand if their ads are grabbing attention from viewers. However, unlike ROAS, you can’t gauge ad performance with CTR.