What is ROAS?
“ROAS” is an acronym that stands for “return on ad spend.” This is a metric that advertisers use to judge the effectiveness of their advertising dollars. You can calculate ROAS by dividing the revenue generated from ads by the cost of those ads.
ROAS gives businesses a way to assess whether their marketing strategy is working or not. If the ROAS is favorable, then it’s an encouragement to continue in the same direction. If the ROAS is unfavorable, then businesses know that they’ll have to change their approach.
Why is ROAS an important KPI?
Calculating return on ad spend is important because it gives you a quick look into profitability. Whether you’re looking into entire campaigns or individual keywords, ROAS can give you quick insight into which keywords, campaigns, or ad groups are the most efficient.
Taking a look into conversions, conversion value, and conversion rate can start to give you an idea of how well your keywords are working. However, if you have multiple conversion types or products that generate different amounts of revenue, analyzing one level deeper is crucial to running a profitable and efficient campaign.
How does ROAS work?
ROAS looks at the actual value generated for each dollar that you spend on advertising. In order to calculate ROAS, you’ll need to take the total conversion value of your marketing campaign and divide it by the amount that you spent on the campaign.
The conversion value is the numerical value that you assign to the conversions made due to each campaign. Briefly, conversion value is the amount of revenue generated through conversions, or sales, in the course of your campaign.
In order to calculate ROAS, take the conversion value from the campaign and divide it by the amount that you spent on ads. That will give you the ROAS, or the amount of revenue your business brought in for each dollar spent on your campaign.
How to calculate ROAS
Calculating ROAS is a matter of collecting the right data and applying that data to a formula.
As you have seen, you will need to capture data on the cost of each one of your advertising campaigns. You will also need to collect data on the conversions made as a result of each advertising or marketing campaign.
Once you have collected that data, you will plug the numbers into a formula. You calculate ROAS by taking the conversion value from the campaign and dividing it by the amount that you spent on ads. That will yield you the ROAS for the campaign under consideration.
How do you calculate ROAS percentage?
Let’s look at an example of how ROAS calculation might work.
Suppose your company decides to mount a new Google Ads campaign to promote your new Spring-themed line of widgets. You spend a total of $2,000 on the campaign in the month of April.
Your campaign goes well, the customers love your new widgets, and you take in a revenue of $10,000.
To calculate your ROAS, take your conversion value — that’s the $10,000 you brought in with widget sales — and divide it by $2,000, or the amount you spent on the advertising campaign.
The result is $5 — for every dollar that you spent in advertising, you took in $5. Your ROAS can be expressed as a ratio or 5:1. Or, simply take the result and multiply it by 100 to get your result as a percentage. In this case, you saw a ROAS of 500%.
What is a good ROAS percentage?
The right ROAS percentage depends on the details of your business. In order to calculate what kind of return on ad spend makes sense for you, you’ll need to look at your profit margins, your operating expenses, and the long- and short-term needs of your business.
In other words, there is no one, magic ROAS percentage that every business should aim to achieve.
That said, many businesses consider 400% a good ROAS. That would mean that for every dollar spent on advertising, your business is generating four dollars in revenue. (Another common way to express ROAS is as a ratio: a good ROAS ratio is 4:1.)
If you already have a large profit margin, then your business can probably succeed with a lower ROAS. If, on the other hand, you have smaller profit margins, then you probably can’t afford to spend too much of your funds on advertising. You should aim for a higher ROAS percentage.
Smaller, newer businesses will probably need to earn a higher ROAS. The same is true for businesses on a lean budget. By the same token, a more established business may have enough space in its advertising budget to survive on a far lower ROAS.
Using ROAS, Target CPAs and Other Acronyms
No one metric is the end-all, be-all for digital marketers. Depending on a flurry of factors, it can be more valuable to focus on one KPI over another. For example, a SaaS (software as a service) company is going to be generating revenue far differently than an eCommerce business and subsequently their KPIs are going to be valued differently.
While both may use all the acronyms, some will be a better measure of effectiveness than others based on business models. Target CPAs (target cost-per-acquisition) are more common for businesses selling one large ticket item, when we know that lifetime customer value is higher. ROAS can be more important for eCommerce so that you know profitability on specific items and keywords.
