Defining & Calculating Return on Ad Spend (ROAS)
Wondering how to calculate ROAS? This oft-spotted acronym is an integral part of gauging the success of certain advertising efforts within a given marketing strategy. Whether you’re looking for info to boost your general knowledge base or want to understand the relationship between ROAS and campaigns, this quick guide has you covered.
What Is ROAS?
ROAS stands for “return on advertising spend.” This calculation is used to measure how much revenue a specific advertising campaign is bringing in compared to the amount of money spent on ads related to that campaign.
People tasked with managing ad accounts rely on ROAS to convey how cost-effective a campaign truly is. This is an objective and quantitative way to understand how a new ad campaign is running, but you can also use ROAS to find out whether an existing campaign is trending in the right direction.
How to Calculate Return on Ad Spend (ROAS)
It’s quite easy to calculate ROAS. Simply identify the revenue brought in by your ad campaign and divide that number by the cost of that same campaign. For example, if your ad spend totals $2,000 and your total ad revenue is $4,000, your ROAS calculation would be $4,000 divided by $2,000 = 200% (or a 2:1 ratio).
To make things even easier, you can use an online ROAS calculator to quickly determine how ad spend and ad revenue are playing out on a given campaign. All you need is your total ad spend and revenue, and the calculator does the rest.
Why Do Marketers Calculate ROAS?
Marketers measure ROAS to see how effective their ad campaigns truly are. This is a major step toward discerning whether a campaign is tracking toward pre-determined goals or falling short of expectations. Calculating ROAS early on in the campaign (and then at regular milestones moving forward) also helps marketers optimize advertising spend, as they can opt to decrease spending for low-performing campaigns and reallocate those funds to high-performing campaigns.
The information offered by ROAS can also help determine the wider direction of your marketing strategy. One relatively simple calculation gives you hints as to what campaigns, content types and distribution channels your target demo may be responding to most.
What’s Considered a Good ROAS?
Good ROAS is a relative concept that depends heavily on the goal of your campaign and the averages for your industry. For instance, if your goal is to drive awareness of a new streaming service, you may be okay with a lower ROAS because that number reflects conversions rather than awareness. When you’re measuring ROAS early on in the buyer’s journey, the numbers just may not be as impressive.
High ROAS matters more when your advertising strategy focuses on getting upfront revenue from a customer base that typically has a lower lifetime value. You want to see ROAS that are above the oft-cited 4:1 benchmark because it’s understood that will likely follow a downward trend over time.
How ROAS Relates to Profit and ROI
ROAS and ROI are often conflated, which makes sense when you realize that ROAS is basically one spoke in the ROI wheel. ROI stands for “return on investment,” which is a more long-term measurement of the return you get from larger marketing and advertising efforts. This includes things like fees paid to an SEO agency or your freelance video editing team. ROAS is a more short-term measurement that focuses solely on whether ads are driving revenue.
ROI also takes net profit into account (ROI is calculated as Net Profit divided by Net Spend), while ROAS deals with revenue and ad cost.
Many marketers choose to measure both ROAS and ROI, as the metrics combined can help the powers that be understand campaign performance and how it contributes to the business’s success and bottom line.
Key Factors & Considerations for an Accurate ROAS Calculation
Because you’re likely using ROAS to determine the future of your ad campaign, it’s crucial your calculations are as accurate as possible.
Here are some things to consider as you work with ROAS, plus a few tips on how you can ensure your numbers are right on the mark.
Don’t Forget the Fees
Some marketers prefer to calculate ROAS based solely on ad costs, but it can be helpful to take peripheral expenses into account as well.
If you’ve decided to include all ad-associated costs in your ROAS calculation, you’ll need to round up receipts that reflect fees paid out while executing the campaign. This includes vendor fees and transaction fees, like the percentage PayPal takes when charging for goods and services or the rate platforms charge to facilitate a campaign. Mine your accounts for other less conspicuous charges like commissions and relevant employee expenses, too.
Popularity Pays Off
Remember how we said good ROAS is all relative? Here’s another example of that. Brands new to the market are likely to have lower ROAS because they’re shouldering the entire cost of raising awareness and acquiring those customers. Existing brands launching a new campaign might have a high ROAS right off the bat because they’re able to leverage brand familiarity and established relationships.
Known When to Hold ‘Em — and When to Fold ‘Em
It’s vital to understand when ROAS percentages should be worrisome and when you just need to wait out a slump. Typically, ROAS below 300% is cause for concern, meaning you either need to revamp and reoptimize your campaign or consider pulling it altogether. Re-optimization could mean:
- Changing up the demographic you’re targeting
- Trying new ad types and channels
- Tweaking pricing or the type of promotional offer attached to the campaign
- Reworking the actual look and feel of your ads — perhaps hiring a writer to change the tone of the service description or changing up the imagery
But sometimes, especially when a company or service offering is brand new, ramping up ROAS just takes time.
Avoid Relying on ROAS Alone
ROAS is important, but it shouldn’t be evaluated in a vacuum. Instead, look at ROAS in relation to other factors such as the goal of your advertising campaign and conversion factors like click-through rates to get a better understanding of the overall health of your initiative. Actual numbers matter too — you could have a high ROI and still lose money if production costs are overwhelming.
“We are very data-driven and everything we do has to have a KPI associated with it. ROAS is only one point in the picture and it’s not always even the most important one. People can get very focused on ROAS but especially in the testing and trying phase, there’s a lot of learnings and KPIs that could make more sense.”
– Maya Wasserman | Head of Marketing / Director of Marketing Communications, Sony (Source)
Conclusion
Determining how to calculate ROAS is important, but it’s arguably even more critical to understand why ROAS matters and what role it plays in strategizing and executing effective ad campaigns. These concepts become even more important in niches like non-click-based media, like Streaming.
For example, at Tinuiti we often see marketers struggling to measure the full impact and demand of ad campaigns and consumer activity. But make no mistake, Streaming drives ROAS and we can prove it. Our patented solution, powered by Bliss Point technology, intelligently applies modern machine learning and optimization techniques to the non-click-based Streaming environment. That’s a fancy way of saying we can prove the channel is working with our highly technical attribution tools, even without a clickstream. That’s good news for high-growth brands looking to efficiently scale streaming campaigns with full-funnel attribution.
Want to learn more about the relationship between streaming and bottom of the funnel channels? Be sure to register for our upcoming webinar “Streaming Ads that Work – and Why” Streaming+ today.
You Might Be Interested In
