Definition: Return on ad spend (ROAS) is a marketing metric that measures the amount of revenue earned for every dollar spent on advertising. You can calculate ROAS using the following formula: Revenue Attributed to Ad Spend / Advertising Costs.
Keep reading to learn more about ROAS. Whether you’re curious about its meaning, formula, or comparison to return on investment (ROI), you can find all that information right here, plus access expert tips for improving yours.
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What is ROAS?
Return on ad spend (ROAS) is a marketing metric that assesses the performance and financial return of a digital advertising strategy, campaign, or ad group. Using and measuring this metric can help companies improve their ad strategies and monetary returns.
How to calculate ROAS
Use the ROAS formula, which divides your ad strategy’s total revenue by its total cost, to calculate your ROAS:
ROAS = Revenue / Cost
With this formula, your team can find your company’s unique ROAS value by determining the following:
- The total revenue (in a dollar amount) generated by your ad strategy
- The total cost (in a dollar amount) of managing your ad strategy
Once you have those two pieces of data, divide your total revenue by your total cost, and voilà!
Your ROAS is expressed as a dollar amount and represents what your company earns back (on average) for every dollar spent on your ad campaign. If yours equaled $5, for instance, that would mean your business earns $5 for every $1 spent.
What costs should ROAS include?
When calculating ROAS, remember to include these costs:
- Ad spend
- Advertising tools or software
- Ad management fees, like those paid to an agency, consultant, or freelancer
- Partner or vendor costs
- Affiliate fees or commissions
Depending on your business, you might exclude some of these costs. For example, a company might exclude salaries in its ROAS formula.
[Example] How to use the ROAS formula
Check out the fictional example below to gain perspective on how to calculate your ROAS.
Acme Industries promotes its widgets with a series of social media campaigns, as well as paid search campaigns. Right now, though, the company wants to calculate the return of its paid search efforts for the month.
It’ll use the ROAS formula to look at the revenue and cost of its paid search campaigns.
The team totals its costs and discovers the following monthly expenses:
- Ad spend: $2500
- Software: $100
- Management fees: $800
- Total cost: $3400
Next, Acme Industries needs to calculate the revenue generated by its paid search campaigns.
When it comes to estimating ad revenue, Acme Industries needs to consider a few factors.
First, they must determine how much a new lead is worth to their business.
Second, they need to calculate the total profit margin for different purchases.
Once they do that, they can calculate their ad revenue.
Following its calculations, Acme Industries finds:
- 8 new leads (at $500 per lead): $4000
- 3 new purchases of Product A (at $250 per purchase): $750
- 1 new purchase of Product B (at $450 per purchase): $450
- Total ad revenue: $5200
Now, the Acme Industries team can input all their data into the ROAS formula:
ROAS = Total Revenue / Total Cost
ROAS = $5200 / $3400
ROAS = $1.50
For Acme Industries, their paid search campaigns generate $1.50 (on average) for every $1 spent. Are you wondering whether Acme Industries earned a good ROAS from its ad strategy? Good, because you should!
Understanding whether you’re delivering a good, bad, or average return on ad spend is essential. It helps you and your team determine a benchmark for your ad strategies, as well as if your company can improve the performance of its ad campaigns.
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How to calculate your break-even ROAS
Your break-even ROAS tells you how much money your ad needs to make to cover its cost. Calculating your break-even ROAS is extremely helpful if you’re just getting started with online advertising and want to figure out what your ROAS should be to help you earn a profit.
Before you can calculate your break-even ROAS, you need to know your average profit margin percentage. To calculate your average profit margin, use this formula:
Average Profit Margin = Average Order Value – Average Order Costs
And to calculate your average profit margin percentage, you can use this formula:
Average Profit Margin % = (Average Profit Margin / Average Order Value) X 100
You can then calculate your break-even ROAS with this formula:
Break-even ROAS = 1 / Average Profit Margin %
Let’s put this formula into action with an example profit margin of 60%. In this case, 1/60% is 167%. That means you’ll break even at 167% ROAS. If your ROAS is below this number, you’re losing money on your ad.
What is a good ROAS?
A “good” ROAS depends on several factors, including your profit margins, industry, and average cost-per-click (CPC). Most companies aim for a 4:1 ratio — $4 in revenue to $1 in ad costs. The average ROAS, however, is 2:1 — $2 in revenue to $1 in ad costs. Different strategies can help improve your ROAS.
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What determines a “good” ROAS?
When it comes to determining a good ROAS for your company, you need to think about the following:
- Your industry
- Your profit margins
- Your average cost-per-click (CPC)
Once you figure out these details, you can uncover the optimum dollar amount for your business.
Why should ROAS matter to your business?
Your ROAS should matter to your team and company for a few reasons, including:
- Evaluate the average performance and financial return of your ad campaigns
- Get accurate data for supporting ad spend increases, campaign budget changes, and more
- Determine the most valuable and highest-performing ad campaigns, ad groups, and ads
- Obtain a benchmark average for your ads to measure against future calculations
- And more
Overall, calculating your ROAS informs your company and your team about the performance and quality of your ad campaign. It provides you with actionable and insightful data that you can use to optimize your ad spend. If you skip the formula and guess about the performance of your ad campaigns, it becomes easy to waste your ad spend and diminish the number of leads and sales coming in from advertising.
How is ROAS different from ROI?
When talking about ROAS, it’s natural to ask how it’s different from ROI.
ROI calculates how much your company makes from advertising (or another channel) after expenses, which includes operational costs, turnover, and more. In comparison, ROAS determines how much your business earns (on average) from advertising only.
Since they measure different aspects of your campaign, ROAS and ROI also use different formulas.
|ROAS Formula||ROI Formula|
ROAs = Revenue / Cost
ROI = Net Profit / Total Investment*100
If you’re struggling to remember the differences between ROI and ROAS, think about the two from this perspective. ROAS measures your average return from advertising while ROI measures your total return from advertising.
3 ways your company can make its ROAS 10x better
Like your competitors, you want to improve your ROAS to maximize the performance of your ads.
With these three tactics, you can improve your ads and takes your return on ad spend to new levels:
1. Launch a branded PPC campaign
A branded PPC campaign, which targets your company’s name, can help your business earn a better return from your advertising efforts. Branded searches often generate conversions because users searching for a brand generally want to make a purchase or contact the company.
2. Use negative keywords
Negative keywords can also help improve your ROAS.
With negative keywords, you prevent your ads from appearing in searches that feature those keywords. These keywords, while similar to your targeted keywords, tend to go outside the scope of your business, products, or services.
If your company runs a series of recruitment ads, for example, you may add these negative keywords:
- Job openings
Take a look at your ad campaigns and see where you can take advantage of negative keywords.
3. Optimize landing pages for speed, usability, and conversion
Your landing page, or where your ads send users when they click, can have a tremendous impact on your ad performance. Campaigns that use slow-loading, clunky-looking pages almost always throw away valuable leads and sales because those landing pages provide such an unfriendly user experience.
If you want your landing pages to make buying your products or contacting your team easy, you need a fast, reliable, and easy-to-use page. You can take care of these tasks in-house, though you’ll need a web designer and web developer.
Got a ROAS in the red? Get professional help from WebFX
No company, no matter how large or small, can afford a ROAS in the red. When your ads fail to generate the revenue and results that your business needs, it places your company (and you) in a difficult spot.
Professional ad management services from WebFX can take away the stress and worry over your ad campaigns and provide the results and revenue you need.
Learn more about how our paid advertising services, from search to social, can help your business earn an impressive return on ad spend by contacting us online or calling us at 888-601-5359 to chat with a strategist about your goals, company, and more!
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