The ROAS calculation uses two critical parts of your marketing—your ad spend and total revenue—to evaluate whether you need to adjust your budget or strategy.
Return on advertising spend, or ROAS, is more than just another bit of marketing jargon—it’s a critical metric to measure the success of your advertising campaign.
With US companies spending more than $125 billion on digital advertising annually, failing to monitor your ad’s performance can result in lost profit and a lackluster campaign.
ROAS Meaning + Calculation
Determining ROAS can be challenging when running multiple campaigns across multiple platforms. But, to find out what works and what doesn’t, you only need to know one simple ROAS formula. Learn the meaning of ROAS, how to calculate ROAS, and the ROAS formula below.
We’ll also cover the benefits and limitations of this critical marketing metric.
What is Return on Ad Spend, or ROAS?
Return on ad spend (ROAS) is a simple calculation measuring the cost-effectiveness of an advertising strategy. It measures the dollars made for every dollar spent.
We’ve all heard of ROI—or Return on Investment. It’s a typical metric businesses and investors use to see if they’re making a profit on their portfolios. After all, no one wants to throw good money after bad.
ROAS is essentially the same metric but for ad spend. It’s what’s known as a key performance indicator (KPI)—and it’s one of the most important.
In a nutshell—the bigger your ROAS, the more money you make. It’s that simple.
How to Calculate ROAS
Learning to calculate your ROAS isn’t necessarily complicated—finding the correct information is. You’ll often see a single ROAS formula on most tutorials. There are two ways to calculate your ROAS:
Calculation Pt. 1: Revenue / Cost:
This calculation keeps it basic. You divide your revenue by the advertisement cost. You’ll need to add on everything you spent—marketing campaigns, affiliate commissions, campaign designers, campaign managers, and more.
You’ll learn how much money you’re netting for every dollar spent—you’re not accounting for any costs related to your product or services. (In short—it’s not a true ROI.)
Calculation Pt. 2: (Revenue – Cost) / Cost:
This ROAS calculation deducts the cost of your advertising spend from your revenue and divides it by the cost of advertising and marketing. We’ll see the advantages of this method below.
Let’s run through a couple of examples—suppose you spent $1,000 on an ad and made a revenue of $3,000.
In the first calculation, you earned $3 for every $1 spent on ads. Using the ROAS formula: $3,000 / $1,000 = $3.
In the second way to calculate ROAS, we dig deeper. You earned an extra $2 for every $1 spent on ads. Using the ROAS formula: ($3,000 – $1,000) / $1,000 = $2.
Hint: Multiply your ROAS by 100, and you’ll turn it into a percentage.
It’s not complex math. However, it can be a little challenging to understand what’s going on. Not all situations are as simple as what’s described above. Your ad campaign could be based on Google Ads, or it could also extend across multiple platforms.
Interpreting the Calculations
Businesses want to generate revenue—it means profit. While ad campaigns can be helpful merely to increase business awareness, in the end, the goal is to drive sales. That’s where Google Ad ROAS formulas come in.
It informs small business owners, marketing managers, and others if their current marketing strategies are worth it. However, it can create more precise insights depending on what information you push through the ROAS formula.
Use your total ad spend and revenue across all your campaigns, and you’ll generate a broad-scale evaluation of your marketing efforts. In contrast, use the information solely from each marketing channel, and you can dissect the first figure—finding out which channels are your biggest revenue generators per dollar spent.
It’s vital to continually evaluate ROAS throughout a campaign’s lifetime. If it isn’t working, it isn’t working. After all, racking up hefty losses is something all businesses want to avoid.
You track and calculate ROAS for Google Ads in many free and paid online services. Google Ads, for example, displays ROAS for your ad campaign on the dashboard.
Is Your ROAS Good?
Spend $1 and get $2 back—sounds good, right? It’s a return on investment. Not exactly. Whether your ROAS is desirable depends on several factors:
- Industry
- Your average cost-per-click (CPC)
- Profit margins
A ROAS of 2:1—$2 in revenue for $1 in ad costs is considered good in some industries. In others, a 4:1 ratio is desirable.
According to Google, companies could earn an average of $8 for every $1 spent. (Google divided their Google Ads revenue by what advertisers spent.)
However, most companies aren’t achieving that. Aim for a 4:1 target ROAS for Google ads ratio—it’s a good benchmark across all industries.
Downsides of the Calculation
No metric is perfect. Only by interpreting multiple metrics can you truly gauge the success of a marketing campaign. For instance, even if your ROAS is high, you could lose money if you overspend on production and shipping.
ROAS ≠ Profit
No company should rely on ROAS alone. It’s also tricky to understand whether your ROAS is suitable for your industry.
Nevertheless, ROAS is a remarkable metric, given the simplicity of the ROAS formula. Therefore, learning how to calculate ROAS is an essential skill for any business owner or marketing manager. Just treat the end figure as one step in the profit-making process.
Average Google Ads ROAS and ROI: Are They The Same?
Return on Ad Spend (ROAS) and Return on Investment (ROI) are two essential metrics in marketing, but they serve distinct purposes. While related, these metrics provide different insights into the effectiveness of marketing efforts.
Comprehensive vs. Narrow View
ROI offers a comprehensive view of overall investment returns, considering all marketing campaign or project aspects. It considers the total costs involved and the full spectrum of returns generated.
On the other hand, ROAS narrows its focus to the specific performance of advertising campaigns, looking solely at the relationship between ad spend and the revenue it generates.
Metric Scope
As you discover what is a good ROAS for Google Ads, you’ll figure out that the scope of these metrics is a key differentiator. ROI evaluates the entire project or campaign, including all associated costs and returns.
It might involve agency fees, creative costs, technology expenses, and returns like direct sales revenue and indirect revenue from lead generation, customer retention, and lifetime value.
ROAS, however, concentrates solely on advertising spend and the direct revenue it produces.
The components used in calculating these metrics reflect their different scopes.
Calculations
ROI calculations include a wide range of investment costs and returns, providing a holistic view of a campaign’s financial impact. ROAS, being more focused, only considers the cost of advertising and the direct revenue it generates.
Google Ad ROAS and ROI offer valuable insights into marketing performance, and using them in tandem provides a well-rounded understanding of marketing initiatives.
ROI is ideal for gaining a holistic view of campaign success, while ROAS is particularly useful for optimizing specific advertising efforts.
By employing both metrics, marketers can ensure they comprehensively understand their marketing performance, from the broad strokes of overall campaign profitability to the fine details of individual ad effectiveness.
Elevate your Google Ads and ROAS with Us!
Do you need to generate more leads with your Google Ads campaign and increase your return on ad spend (ROAS)? Contact the Google Ads experts at Clicta Digital.
Our experts understand what it takes to cultivate a winning ROAS calculation strategy to increase leads.
