When you run a marketing campaign, you want to know how much bang you'll get for your buck.
Return on advertising spend (ROAS) is one of the best metrics to determine whether a campaign is worth your business's money and time. Today, let’s take a closer look at ROAS, its meaning, and how to calculate your advertising costs versus your profits.
Let’s look at this important metric and find out how it applies to your digital marketing efforts.
Return on ad spend is one of the most important key performance indicators (KPIs) for online and mobile marketing. In a nutshell, ROAS tells you how much revenue you earn per dollar you spend on an ad campaign or a given advertisement. It effectively measures the return on your marketing investment.
If you have a higher return on ad spend, it means that you make more money from spending a certain amount of cash on a certain marketing campaign or set of advertisements. The reverse is true if you have a lower ROAS.
Think of ROAS as the profit you make from investing money into an ad campaign. Thanks to ROAS, you can determine which ads are most effective so you can make future marketing campaigns even more profitable and persuasive to your target audience members.
To use ROAS effectively, you need to know how to calculate it. Luckily, ROAS calculation starts with a simple formula.
The revenue attributable to ads is any money you can safely or reasonably attribute to your advertisements. You divide that number by the cost of running those advertisements, then multiply the result by 100.
Want an example? Imagine that you decide to run an ad campaign that costs $1000 in an upfront or initial investment. After the campaign runs its course, you can reasonably attribute about $3000 in revenue to that ad campaign. Plug those numbers into the formula, and you get:
In other words, you made three times more money from your investment than you spent. In practically every industry, that’s a good deal.
That said, calculating ROAS can be a little trickier than displayed above because you have to know:
You should be able to gather most or all of this information from your marketing data (which comes from past campaigns). If you don’t have it, give your best guess. Your next ads will help you predict the ROAS for future campaigns in no time.
Since advertising incurs many more costs aside from ad listing fees, you’ll also want to consider these factors when calculating the total cost of an ad campaign:
Once you have that information, you'll be able to more accurately calculate the return on ad spend.
There are plenty of situations where you should consider your return on ad spend.
ROAS is especially helpful when you want to optimize short-term marketing campaigns or other advertising strategies.
Say that you want to determine whether one of two similar advertisements gives you better bang for your buck. ROAS can help you determine that since you can look at the return on each advertisement’s initial investment.
Furthermore, this marketing metric can help determine whether a marketing campaign successfully contributes to your overall brand profit margin. This can help you determine your long-term branding or marketing strategies using a certain ad platform. If you’re trying to determine whether to focus your advertising efforts on your Facebook Ads account or Google, looking at which has the higher ROAS can help you decide.
For example, suppose you can safely attribute a lot of profit to an out-of-home (OOH) marketing campaign thanks to ROAS. In that case, you can double down on billboard ads and move some of your marketing budgets away from less profitable avenues.
Return on ad spend is similar to return on investment, but there are some differences to keep in mind.
Return on investment or ROI is the return of a specific monetary investment relative to its costs. It's a little more generalized as it can be used for things beyond advertising campaigns or spending on ads.
The ROI formula is:
ROI is often better used when you need to determine the long-term profitability of a marketing campaign or type of advertisement. However, you can also use return on investment in many of the same situations as return on ad spend.
ROAS might be a little more accurate if you have more information about just how much a given advertisement or ad campaign costs your business, however.
There’s no such thing as a universally good ROAS for any eCommerce business, as a good return on your investment is contingent on your advertising goals, your branded industry, and how much money you spent in the first place.
For example, suppose you want to launch a marketing campaign to improve brand awareness. In that case, ROAS can be low since you don’t necessarily care about making big profits, just improving your brand’s exposure to its target audience.
However, if your ad campaign primarily intends to drive sales for a new product or service, you’ll want a high ROAS over a low ROAS.
In general, you should try to get a return on ad spend of 3 or 4:1. Put another way, for every $1 you spend on an ad or ad campaign, you want to generate $3 or $4 in total revenue. That might sound difficult, but it’s definitely feasible with the right marketing campaign philosophies and the right tools to help you get the job done.
Remember, your target ROAS is dependent on your brand and your goals, so don’t worry if it’s lower than this benchmark at first.
Return on ad spend can help you determine whether a given advertisement — or, indeed, even an entire marketing campaign — is worth the time and money it will take to produce it. With ROAS, you can create and launch only the most impressive and worthwhile advertisements, maximizing the effectiveness of your marketing overall.
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