What Is ROAS?

ROAS is short for Return On Ad Spend, and it refers to the effectiveness of your advertising efforts. In other words, it’s the revenue generated for every dollar invested in an advertising campaign. 

It’s rooted in the ROI (Return On Investment) principle. However, ROI is calculated for any business investment and can include various spending factors such as salaries, software, subscriptions, etc. ROAS focuses solely on advertising revenue, and businesses can use it at a higher and more detailed level.

Who Should Use ROAS?

Anyone who’s using ads to try to get business should use it to track the effectiveness of their ad campaigns.

How To Calculate ROAS?

You can calculate ROAS reasonably quickly. An ad campaign’s ROAS is defined as the ratio between the revenue generated and the cost incurred.

  • ROAS = Campaign revenue/cost of campaign

If, for instance, you spend $1,000 on a Google Ads campaign in a month and get $4,000 in traffic per month from people clicking those ads, your ROAS will be $4,000 divided by $1,000, or 4:1.  

  • ROAS =  ($4,000/$1,000)*100= 400%
how to calculate ROAS

What Is a Good ROAS?

The higher, the better. Yet there is no “correct” answer, but a 4:1 ratio is a standard benchmark – $4 in revenue for every dollar spent on advertising. 

Start-ups with limited funds may need higher margins, whereas growth-oriented online stores 

can afford to spend more on advertising.

Things To Note About ROAS

  • The ROAS calculation can be either broad or specific. You can calculate it based on your total spending and compare it to your total revenue or target expenditure and income in a particular area, such as the account, ad group, or ad level. 
  • Companies can improve their ROAS by focusing on specific campaigns when ROAS falls below a certain level. Pay-per-click or cost-per-action advertising methods might be better for websites with advertising banners. 
  • ROAS also has its limits. Value is determined by advertising campaigns, conversion factors, and spending. If a company has a high ROAS, it may still lose money if the product is too expensive to produce and ship. Advertisement costs can also be high. 
  • This does not mean the marketing effort was ineffective. ROAS only considers advertising costs; other factors that can reduce profits aren’t considered, such as an unexpected increase in shipping costs.
  • ROAS is easy to calculate, but gathering the required data can be challenging.
  • ROAS allows you to determine how effective your ad campaign is by knowing the amount of revenue generated by the campaign. It can be challenging to attribute sales to specific ads when the customer journey is winding, and data crunching is often required. 

Why Is ROAS Important?

If you don’t calculate ROAS in addition to other factors, you may make poor decisions based on limited information. 

Your advertising campaign should focus on increasing revenue unless your goal is to raise brand awareness. To determine how profitable your campaign was, you must calculate and track ROAS. Without it, you won’t understand the bigger picture, and your advertising analysis won’t be as effective as it could be. 

Tracking ROAS lets you see how an advertisement campaign performs over time. This helps you determine if the campaign is performing as expected or if you should revise it to save money. 

Additionally, your company’s top executives may be interested in your marketing efforts. You can prove how effective your marketing and advertising efforts have been by showing them your ability to reach your target ROAS. 

ROAS shows you which ads are effective and how you can improve them in the future based on the ad groups and keywords working well today. This allows you to continuously optimize your ad spend based on ROAS.

Key Takeaways about ROAS

Tracking ROAS is essential when it comes to determining whether your ad campaign is bringing you in more money or not. 

However, here are other key takeaways to take into account:

  • The return on ad spend, or ROAS determines how effective a company’s advertising is.
  • It’s calculated by dividing revenue by advertising costs.
  • Companies may not be able to identify other issues with products, such as high production and shipping costs, since revenue is the only thing only calculated.

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