Return on Ad Spend (ROAS) is a marketing metric that measures revenue earned for each dollar you spend on advertising. By calculating and tracking ROAS, you gain insights on the effectiveness of your advertising. You can calculate ROAS for a wide variety of advertising initiatives, from measuring ROAS on single ads or projects, to calculating ROAS on monthly campaigns or for an entire year’s worth of advertising spend.
How to Calculate Return on Ad Spend (ROAS)
Calculating ROAS is simple. You divide the revenue attributed to your ad campaign by the cost of that campaign. For example, if you spend $1,000 on ads, and your revenue is $2,000, you calculate ROAS by dividing $2,000 by $1,000. This gives you a ratio of 2:1 or 200%. The more effective your campaign, the larger your ROAS and the more revenue you have earned for each advertising dollar spent.
How to Determine Revenue Attribution to Calculate ROAS
Determining what revenue you can attribute to your ad campaign can be complicated. First, you must have access to data that allows you to attribute sales to ads. There are a variety of models you can use to gain these insights.
The single-touch attribution model credits revenue to either the first touch or last touch before a conversion. With first-touch attribution, you are assuming the customer converted into a sale after the first advertisement they saw. Last-touch attribution does the opposite, giving credit to the last advertisement the customer interacted with. Multi-touch attribution gives credit to all touchpoints, and is therefore often considered a more accurate, useful model.
For ROAS calculation, you also need to determine the cost of the ads. In addition to the amount spent directly on the ad platform, there are fees and commissions from partners and vendors. If you don’t factor in these additional costs, your ROAS will be artificially higher.
Consistency in reporting is essential. If you include the additional costs when calculating ROAS, you’ll want to do this again in your next calculation. When you optimize your ad campaigns, this ensures that your increased ROAS is based solely on the changes you made.
Why Does ROAS Calculation Matter?
Businesses need to determine if an ad campaign is working. Tracking and calculating ROAS is an effective way to identify areas where you can decrease advertising spend (on low-ROAS programs) and opportunities to “double down” (allocating more budget to high-ROAS programs).
You can use a variety of methods to optimize for ROAS. One approach is to run multiple campaigns in parallel, running ROAS calculations for each. The low-performing campaigns can be dialed back, while more budget is given to the higher-performing campaigns. Insights gained from measuring ROAS can help determine future marketing direction and improve efficiency with ad spend.
What Is a Good ROAS?
A good ROAS depends on a number of factors, including your advertising goals. If brand awareness is your goal, ROAS will be low, since awareness does not typically drive immediate conversions.
A good ROAS also varies across industries. Some industries require a higher ROAS for the advertising spend to be considered worthwhile. For example, a higher ROAS may be expected with companies that have a low customer lifetime value (CLV). More revenue up front makes up for the fact that less revenue is generated over the customer’s lifetime.
A common benchmark for ROAS calculations is 4:1. This means that for every $1 you spend, you generate $4 in revenue. The appropriate ROAS benchmark varies across industries. Before you launch an ad campaign, determine a target ROAS that is suitable to your business and industry.
What Is the Difference Between ROAS and ROI?
The difference between ROAS and ROI (return on investment) is that ROAS only looks at the revenue gained from a specific ad campaign. ROAS is a short-term measurement—it’s the best metric to use when determining if your advertisements are driving revenue effectively.
ROI measures the return from larger marketing and advertising efforts, such as paying influencers, hiring an SEO agency, hiring freelance writers, and maintaining a blog. It’s a good idea to measure both ROAS and ROI.
How Do You Improve Your ROAS?
First, review the data you’re using in your ROAS calculation. Make sure you are only considering the advertising costs and not unrelated costs, such as order fulfillment. Erroneously including unrelated costs makes your ROAS look lower than it actually is.
Next, analyze your end-to-end flow from ad placement to conversion. The conversion rate on your landing page refers to the percentage of landing page visits that result in a sale. If you’re successfully driving visits to your landing page, but your ROAS is low, chances are your page’s conversion rate is the issue in your ROAS calculation.
Make sure everything is set up properly on the landing page, including a clear and noticeable call-to-action. Next, ensure that the wording and offers on your landing page align with elements of your ad copy (such as ad headline, sub-head, link text, etc.).
Another factor to consider to improve your ROAS calculations—and the results—is whether your ads have run for too long. Ad fatigue results when your audience is tired of seeing your ads; customers and prospects notice them, but don’t click through to your landing page. Try creating and A/B testing new ads against the old ones—with new offers, ad copy, and creative—when your ROAS decreases.
Next, analyze your ad targeting. If you’re showing your ads to the wrong people, the offer won’t be relevant, so they won’t click through and purchase. Most ad platforms support highly precise targeting, such as company size, job title, seniority, industry and geographic location. Consider uploading customer lists and using the “lookalike audience” capabilities of ad platforms or of your customer data platform (CDP). This feature uses your current customers as a proxy of which prospective customers to target with ads.
Also consider issues not related to the ad itself. If you are generating sales, but your ROAS is low, you may have priced things too low. Consider a price increase on products that are selling well and think of ways to increase the average order value (e.g., buy one and get the second at 33% off).