How to Calculate and Use the Return On Ad Spend (ROAS) Formula
ROAS, ROAS, ROAS.
If you have anything to do with online advertising or e-commerce, you probably hear ROAS referenced a couple of thousand times a day.
It makes sense – ROAS is the single most important metric when it comes to whether your company’s ad campaigns are actually working to generate revenue in the context of how much you’re spending on them. In other words, ROAS is the end-all, be-all when it comes to declaring success when it comes specifically to digital advertising.
Yes, it’s common for marketing managers to be monitoring dozens of metrics at any time for any given campaign, but there can be a lot of noise in these indicators.
Different ads serve different purposes, too – the type of marketing campaign and the intended audience means that many metrics may be crucial for one type of marketing strategy, and useless for another.
Your key metrics for a retargeting campaign, for example, will be completely different from a campaign made specifically for prospecting. This is why ROAS is so critical.
With ROAS, you have the most direct metric you could ask for when it comes to advertising, and its relevance stretches across every type of ad campaign, demographic and channel. It tells you this: “am I spending more money on this campaign than I am earning in total revenue?”
Marketing managers may look at other highly-valued metrics like Clickthrough Rates (CTR), Average Order Value (AOV), and even Conversion Rates as ways to measure whether their campaigns are successful. But these metrics only give you a glimpse of the overall success of the campaign, because ultimately, the goal of any ad campaign is revenue – to bring in more money than you spend.
In this article, we’ll dive into calculating ROAS, determining whether your own ROAS is good or bad, and then give you some tips as to how to find an agency that can help you nail your ROAS.
ROAS calculations are a breeze. All it takes is one simple formula:
ROAS = Revenue earned from a specific ad set or campaign//total advertising spend on that ad set or campaign
It’s that simple. All you need to do is divide the amount of revenue your ad has brought in by the amount that you’ve spent on your advertising efforts. The result will tell you whether this specific ad campaign is working to bring in revenue for your company or whether you need to work further on your campaign to increase revenue, and hopefully profit margins, or bring down advertising costs.
For example, let’s say we launched an ad set via Google Ads. Inside the Google Ads dashboard, we can see the cost of ads at $2,000 on this placement, and we’re generating $5,000 in revenue.
Using our ROAS formula from earlier, we take the revenue from the ad – $5,000 – and divide that by the spend – $2,000.
Using our formula of ROAS = Revenue/Spend, we get:
ROAS = $5,000/$2,000 = 2.5
What does that 2.5 mean? That means that for every $1 you’re spending on this Google Ads campaign, it is earning $2.50 in revenue, or your campaign is earning 2.5x what you spent on it. Knowing the average cost and conversion value can help your e-commerce business’ marketing efforts by showing what that specific attribution of your total ad budget is contributing to the bottom line.
You can find all this data on your advertising dashboards.
In Google Ads, you can find a pre-calculated ROAS metric under acquisition → GoogleAds → Campaigns. You can also set up your AdWords dashboard to automatically display ROAS (amongst other metrics) for your various campaigns under the campaigns tab.
For social media such as Facebook and Instagram, you can find ROAS in Facebook Ads, for example, by navigating to Ads Manager → select your campaign → reporting hub or performance (both can supply ROAS data in different ways – graphical or numerical).
One last thing before we move past what ROAS is – ROAS is definitively NOT ROI!
ROAS is Return On Ad Sales, which represents a much smaller piece of the pie than Return On Investment, or ROI, which measures total investment in a campaign or project for your business.
Many businesses make the mistake of confusing these two, but they are not at all the same thing. ROAS only takes into account what you’ve spent on that specific ad campaign, whereas ROI includes all costs related to revenue earned.
That is to say, ROAS doesn’t include things like the cost of goods sold, shipping, labor overhead, agency fees, and so on – so when you’re calculating ROAS, don’t get it confused with ROI.
This is key because although your campaign’s ROAS may be healthy, you could be losing money. Be mindful as you work with these metrics.
So now you know what ROAS is and where to find it, but how can you know what a good ROAS is? Let’s dig a little more into that.
So Is My ROAS good or bad?
Unfortunately, there’s not one simple way to answer that question. Whether your ROAS is good or bad depends on several factors – the purpose of your ad (i.e., prospecting, retargeting, or branding), the channel your ad is playing on, the desired action of the user (i.e., impressions, conversions, clicks, etc.), the products you offer and the vertical you are in.
That said, there are some common benchmarks for a target ROAS, with the average ROAS across industries landing somewhere between 1.5 and 3. Anything above 3 is widely considered a success, or a high ROAS, although that depends on the competitiveness and saturation of your industry.
As we touched on above, however, ROAS does not exist in a vacuum, nor should it be the sole metric you use – it always needs to be verified by the other elements of your ad campaigns and business as a whole.
It’s crucial to use accompanying metrics to validate that your campaign is successful. Other KPIs like impressions, clickthrough rates (CTR), conversions, average order value (AOV), costs per click (CPC) and costs per action (CPA) are all crucial data points that will give more color and shape to your campaign beyond the simplicity of a high or low ROAS.
For example, if your ROAS seems good, but you’re running a campaign that’s focused on conversions, and your CTR and conversion rates are horrible, then your ROI is probably not as good as the numbers seem. You could not bet spending enough to make the ads worthwhile, for example, or not serving the ads to the right people.
While ROAS is a great bellwether for how a campaign is doing, all results need to be verified using other data points to put your ROAS goals into context. As usual, the devil is in the digital marketing details.
Find an Agency That Helps Achieve Your Advertising Goals
Finding someone to handle those nitty-gritty details in an increasingly competitive digital marketing landscape is crucial for any business looking to succeed in 2022.
The reality is that online advertising is constantly evolving, and the companies that find the most success are those that can uncover and exploit the nuances of ever-changing algorithms. Most business owners simply don’t have the time or the expertise to create that competitive advantage.
As digital advertising becomes more and more labyrinthian, the need for an advertising agency that specializes in maximizing ROAS within the context of your business goals and obstacles is crucial. With so many microscopic details to pay attention to, constantly changing platforms and algorithms, and increasingly fickle audiences, you could spend months babysitting a single marketing campaign from start to finish.
By handing off the burden of understanding, monitoring, iterating, adjusting, and re-adjusting your online marketing campaigns to people who specialize in it, you can see massive returns in your business (that’s ROI, not ROAS ;))