Sales and Marketing
What is Native Advertising?
Learn more about native advertising, how it works, and its difference from other forms of digital advertising.
How to Calculate ROAS? Understanding Return on Ad Spend
Gain an understanding of Return on Ad Spend (ROAS), its importance to business growth and why and how to calculate your ROAS.
Spenmo Team
Mar 15, 2022
You can tell the effectiveness of a marketing campaign based on the metrics that would either tell you whether your bidding strategies or ad spend contribute to a successful campaign or not. For instance, measuring results is one way to help you gauge the efficiency of your advertising costs on Google and other digital platforms.
Calculating your Return on Ad Spend (ROAS) is critical to know if you continue your advertising efforts or you need to change your game plan to achieve your Key Performance Indicators (KPIs). Here's a guide for calculating ROAS and everything you need to understand about spending on Google Ads, Facebook Ads, and other digital advertising avenues.
What is ROAS?
ROAS is a marketing metric that evaluates an advertisement's financial returns and performance. Whether an ad group or a campaign, ROAS lets you assess and improve your current marketing plan. The calculation enables you to easily see if your campaigns are geared towards achieving your e-commerce goals.
ROAS vs ROI vs CPA
Tracking analytics to measure digital marketing efforts' performance often leads to three things: the ROAS, the ROI (return on investment), and the CPA (cost per action or cost per conversion).
At a glance, ROAS refers to your gains from the advertisements you spend on, while ROI is your gain from an investment. CPA is the result when you divide your ad costs against the number of your conversions.
ROI is essentially the measure of an investment's profitability, while ROAS measures the amount of revenue against your advertising spend. Calculating ROAS shows the average return from your campaign, while ROI measures the total return generated from your advertising.
How to Calculate ROAS?
ROAS is determined if you divide the total revenue generated by your ad campaign against the cost of ads. Look at the examples below for a clear understanding of the ROAS formula.
Calculating your costs:
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$100 - the cost of advertisement on an online platform $150 - the cost of the software you bought for the same campaign $550 - fees on management and other used resources $800 - total cost of your online advertising |
Calculating your revenue:
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$1,000 - 100 new leads generated at $10 per lead $2,000 - total value of revenue generated from your online advertising |
Calculating your ROAS from the example above:
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ROAS = Revenue ÷ Ad Costs = 2,000 ÷ 800 ROAS = $2.5 Your ROAS is $2.5 for every dollar spent. |
What is a Good ROAS?
A good ROAS depends on your type of industry, average costs per click, and the company's profit margins. Ideally, most companies target ROAS of at least $4 for every dollar spent. However, companies consider $2:$1 as an average ROAS. A high ROAS means an effective campaign.
Knowing whether a ROAS is good or not depends on your goal. Some companies would want to increase their ROIs through digital advertising, while others are just aiming to increase their market share. Most companies aim to increase their total returns from an ad budget and aim for 2:2 and above, while those with enough reserves and just want market visibility will target 1.5 ROAS and more.
How to Track Your ROAS?
Although Google and Facebook can help track your ad spend on their platforms, you may still need to find out how to track and record other spending related to your marketing campaigns. For instance, if you're paying an individual to manage your Facebook campaigns, his compensation is not recorded on Facebook.
You may need to retrieve invoices and receipts of payment to know how much is spent on his salary alone. The idea becomes more complex if you've hired more than one person. This means that you will be tracking the total spend on compensation for people doing different tasks to fulfil your marketing campaign
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Pro Tip: This is where you can use virtual cards to track, categorise and monitor your expenses easily. Spenmo virtual cards are customisable cards allowing managers to set a budget for different marketing strategies. Through Spenmo, you can accurately calculate ROAS without going through paper invoices and receipts. |
Why ROAS is important for your business?
Traffic click-through rate and conversion rates tell you how your advertising strategy is getting across the platform towards your audience. However, these important metrics do not really show how much money you're making through the marketing campaigns. With ROAS, you can generate accurate reports on ad revenues generated from your advertising strategy.
Reasons why you should know how to calculate ROAS
- ROAS goal helps assess the performance of an advertisement. You can easily see if an ad campaign is working or not. This way, you'd be able to do something about the campaign — whether to revise or eliminate the strategy.
- ROAS provides data to support your campaign budget. Through its calculation, marketing managers can easily ask for budget increases on a specific ad that works. Otherwise, they can also channel their funds towards other efforts should a digital campaign have low ROAS.
- ROAS sets the benchmark for future marketing efforts. By looking at your ROAS metrics, you can plan out your future marketing strategies on social media.
Let's check out how a target ROAS can change your particular online advertising or PPC campaign evaluation. By looking at the table below, you will see how three ad campaigns are assessed using click-through rate and impressions.
| Campaigns | Clicks | Impressions | Cost |
| Ad Campaign 1 | 500 | 350 | $100 |
| Ad Campaign 2 | 1,500 | 1,800 | $100 |
| Ad Campaign 3 | 1,000 | 1,500 | $100 |
Easily, one can say that Ad Campaign #2 is the best performing advertisement when it comes to the total number of click-through rates and impressions. However, this evaluation changes if we now add the ROAS to the metrics.
| Campaigns | Clicks | Impressions | Cost | Revenue | ROAS |
| Ad Campaign 1 | 500 | 350 | $100 | $200 | 2:1 |
| Ad Campaign 2 | 1,500 | 1,800 | $100 | $300 | 3:1 |
| Ad Campaign 3 | 1,000 | 1,500 | $100 | $600 | 6:1 |
Adding the ROAS and revenue shows you a different picture and gives you another way of judging the performance of your campaign. If your goal is to increase visibility, then ad campaign #2 is the most successful because the other campaigns have lower ROAS. However, if your business is looking at growing your earnings from the advertisement, ad campaign #2 is the best performing one.
How to Improve your ROAS
Improving your ROAS goal does not necessarily mean you need to change your entire marketing strategy. Sometimes a few small revamps can make the difference.
Refresh your creatives
When you are producing content, creating advertisements should not depend on what you like. Creatives should rely on what will attract their audience. Best practices in ads creative eye-catching images, simple texts, clear messaging, and a strong call to action.
Try Lookalike Audiences
Lookalike audience refers to potential customers with the same characteristics as your target audience. This feature was initially launched by Facebook some time ago and was also somehow implemented by other social media platforms. Facebook's algorithms help you find an audience with your target audience's same demographics, interests, economic status, and lifestyle. Facebook Lookalike Audience feature can help you make effective targeting.
Balance branded and non-branded keywords
Branded and non-branded keywords both work for the success of your campaign. Non-branded keywords allow you to reach new customers, thus increasing your visibility. On the other hand, branded keywords will improve your competitiveness and conversions.
| Pro Tip: Keep an eye on your competition. By understanding your competitors' services and products, you'll know the most searched terms. |
Optimise your landing pages
Getting that click is the first step, and turning those clicks into sales is the ultimate goal. Optimising your landing pages will help improve the user experience to complete a transaction or take action.
Final Thoughts:
Understanding how ROAS works will help you redefine your marketing strategy and gain profitable results. Revenue can be a complex metric, but tracking your costs through platforms like Spenmo will ease how you calculate ROAS.
Once you've mastered these important metrics and fused them with regular analytics, you'll be able to trim down your ad spend and channel your funds to efficient marketing strategies.