Return on Ad Spend (ROAS)
What is Return on Ad Spend (ROAS)?
Return on ad spend (ROAS) is a marketing metric that tells you how much revenue you make for each $1 you spend on an advertising campaign. The goal is to make more than you spend, resulting in a positive ROAS. You can calculate your return on ad spend across your entire digital advertising budget or break it down to find the ROAS of specific ads, campaigns, and more.
Why Is It Important to Know Return on Ad Spend?
Knowing how much you spend on an advertising campaign versus how much you make from the campaign is crucial because it tells you whether or not your time, money, and efforts are paying off. You can also use ROAS metrics to improve your campaigns, resulting in a higher return on ad spend in the future.
How to Calculate Return on Ad Spend?
Calculating your ROAS is a relatively simple equation:
ROAS = the revenue attributed to an ad campaign / the cost of running the ad campaign
For example, say you create a social media ad campaign for your newest product, which costs $10. You spend $300 to promote your ad on Instagram and Facebook to a targeted audience over one month. After two weeks, your ad brings in a total of 60 sales or $600 of revenue. To calculate your return on ad spend, divide 600 by 300. The result is 2. This positive result means you made more money than you spent, so the campaign is considered a success.
Now, this equation doesn’t factor in the cost of paying the employee(s) who created the social media ad campaign or the cost of the product distribution. So, for a more complete picture of the overall cost of a specific campaign, you can use the same equation and factor in additional expenses into the amount of money invested.
Pro Tip: For a quick and easy way to find out the cost of various kinds of ads and determine your return on ad spend, use AdRoll’s ROAS calculator.
How to Attribute Revenue to Ad Campaigns for ROAS Calculation
Consumers make, on average, eight interactions with a brand before making a purchase. When calculating ROAS, it’s essential to utilize a multi-touch attribution costmodel so you can accurately attribute revenue to ad campaigns. Unlike single-touch models, which typically attribute all revenue to the last touchpoint before the conversion, a multi-touch approach provides a holistic view, crediting various touchpoints throughout the buying journey that influence conversions.
By embedding UTM parameters in ad URLs and leveraging a marketing analytics and attribution tool, marketers can gain valuable insights into the effectiveness of different ad campaigns, channels, and creatives. This level of granular tracking not only enhances attribution accuracy, but also empowers businesses to make data-driven decisions when allocating ad spend. UTM tagging, combined with a multi-touch attribution model, forms a robust framework for evaluating ROAS, enabling marketers to optimize campaigns throughout the customer journey.
What Is a Good ROAS?
The definition of a good ROAS could vary greatly from company to company. A general benchmark for a favorable return on ad spend typically stands at 4:1. In essence, this ratio indicates that for each dollar allocated towards advertising, there is an achievement of $4 in revenue. Nonetheless, what constitutes a "good" ROAS depends on the company’s financial resources, objectives, and supplementary operational costs.
ROAS vs. Other Marketing Metrics
ROAS vs. ROI
Return on ad spend and return on investment (ROI) are both crucial metrics in measuring the effectiveness of advertising campaigns. While ROI evaluates the overall profitability of the total advertising investment, including ad creative and copywriting, ROAS specifically focuses on the advertising spend.
ROAS provides a more direct insight into how well ad campaigns are performing by highlighting the relationship between advertising costs and the revenue generated as a result. This metric is especially useful in digital marketing, where tracking and analyzing campaign performance across different ad types and channels is essential.
By understanding the key differences between ROAS and ROI, marketers can make more informed decisions when allocating budgets and optimizing campaigns for maximum impact. While ROI looks at the bigger picture of profitability, ROAS offers a more granular view that can help pinpoint which specific advertising channels or campaigns are driving the most revenue.
ROAS vs. CAC
Return on ad spend and customer acquisition cost (CAC) are key metrics in any marketing strategy. While CAC focuses on the cost incurred by acquiring a new customer, ROAS quantifies the revenue generated from each dollar spent on advertising.
ROAS helps businesses gauge the effectiveness of their advertising efforts by providing a clear picture of the return generated. On the other hand, CAC sheds light on the investment required to acquire a customer. By comparing ROAS to CAC, businesses can determine the efficiency of their marketing spend and make informed decisions to improve their overall profitability. Striking the right balance between maximizing ROAS and minimizing CAC is essential for sustainable growth and long-term success in the competitive landscape of digital marketing.
How To Improve Your Campaign ROAS
To improve your campaign ROAS, the first step is to analyze past campaigns to see what worked and what didn’t. Using this information, you can set your campaign up for greater success from the beginning.
Next, determine a minimum ROAS for your campaign. This will be your target return on ad spend, which will help you determine the optimal budget allocation across advertising campaigns and channels.
Then, you can set up an A/B test for your campaign. To do this, come up with two or more versions of your campaign and promote them side-by-side for a period of time. Whichever version results in a higher ROAS is the version that continues for the remainder of the campaign.
Keep in mind that ROAS optimization is not a one-time exercise. It’s an iterative process that makes incremental improvements to your campaign performance.
Limitations of Return on Ad Spend
A positive ROAS doesn’t always mean you will make money. As mentioned above, calculating your return on ad spend doesn’t factor in additional costs such as employee labor, product costs, unexpectedly high production or shipping costs, etc. Moreover, there may be instances where a user sees your ad campaign but doesn’t click directly on the ad to purchase the product. Though inspired by your ad, they may visit your website via a different route to eventually make their purchase. In this case, this purchase may not be included in your advertising metrics or your ROAS calculation. Because of these limitations, it is important to use the ROAS metric alongside other marketing metrics to ensure you have a complete picture of the success of your marketing efforts.