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. The ROAS calculation uses two key parts of your marketing – your ad spend and total revenue – to evaluate whether you need to adjust your budget or strategy.
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 + ROAS Calculation
Knowing how to calculate ROAS can be challenging when running several campaigns across multiple platforms. But, to find out what works and what doesn’t, all you need to know is 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.
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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 common metric used by businesses and investors 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. (Yes, I know – it’s a lot of acronyms.)
In a nutshell – the bigger your ROAS, the more money you’re making. It’s that simple.
How to calculate ROAS
Learning how to calculate ROAS isn’t necessarily complicated: finding the correct information is. You’ll often see a single ROAS formula on most tutorials; there are, in fact, two ways to calculate ROAS:
ROAS Calculation Pt. 1: Revenue / Cost:
This ROAS 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.)
ROAS Calculation Pt. 2: (Revenue – Cost) / Cost:
This ROAS calculation deducts the cost of your advertising spend from your revenue and then divides it by the cost of advertising and marketing. We’ll see below the advantages of this method.
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 ROAS calculation, we see you earned $3 for every $1 spent on ads. Using the ROAS formula: $3,000 / $1,000 = $3
In the second ROAS calculation, 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 really 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 ROAS calculations
Businesses want to generate revenue – it means profit. While ad campaigns can be useful merely to increase business awareness, in the end, the goal is to drive sales. That’s where ROAS formulas come in.
It informs small business owners, marketing managers, and others if their current marketing strategies are worth it. But it can create more precise insights depending on what information you push through the ROAS formula.
Use your total ad spend and total 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’ll find ROAS calculated and tracked automatically in quite a few 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:
- Your industry
- Your average cost-per-click (CPC)
- Your 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.)
Most companies aren’t achieving that, however. Try to aim for a 4:1 ratio – it’s a good benchmark across all industries.
Downsides of ROAS 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 spend excessively on production and shipping.
ROAS ≠ Profit
No company should rely on ROAS alone. It’s also tricky to understand if your ROAS is considered good for your industry.
Nevertheless, ROAS is a remarkable metric given the simplicity of the ROAS formula. Learning how to calculate ROAS is, therefore, an essential skill for any business owner or marketing manager. Just treat the end figure as one step in the profit-making process.
Here are a few takeaway tips on ROAS Calculation
- Is your ROAS a 3:1 ratio? Up your digital marketing efforts by rethinking and reformulating your campaign.
- Use the latest Google Ads automated systems, like smart bidding.
- It all depends on your industry and ad spend. Success for some businesses isn’t success for others
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