What Is Return on Ad Spend, or ROAS?

How to Calculate ROAS

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Return on advertising spend, or ROAS, is a measurement used in the world of advertising to compare revenue to the cost of advertising campaigns. The goal of the calculation is to measure the effectiveness of a marketing campaign.

Learn how to calculate ROAS, what this equation can tell you, and the limitations of this measurement.

What Is Return on Ad Spend, or ROAS?

Return on ad spend is a calculation that measures the cost-effectiveness of advertising efforts. It can help businesses and other entities figure out if their advertising strategy is worth it or not.

When a business tries a new advertising campaign, they may compare the ROAS at the start of the campaign, at the mid-point, and at the end. This can help determine whether they should renew the campaign or try another method of outreach.

How Do You Calculate ROAS?

The formula for ROAS is simple. You just need to divide your revenue by the cost of advertising.

Return on ad spend formula

How ROAS Works

Understanding if a form of advertising (such as billboard or digital) is working to bring in sales is incredibly important for businesses. Knowing the ROAS allows companies to determine whether their marketing strategies are worth the money and effort spent. A business's success can depend on the ROAS being profitable (especially in regards to the launch of a new product).

Companies need to know (preferably at the onset of the new effort) if a certain type of advertising campaign is working as anticipated. If not, they need to pull back immediately to counter the effects of a failing campaign. No matter what platform a business chooses for its advertisements, an ill-conceived campaign can quickly rack up hefty losses.

ROAS calculations can be broad or specific. You can calculate the ROAS for your total ad spending and compare that to your total revenue, or you can target the spending and revenue in a specific area. There are quite a few free and paid services online that can assist businesses in tracking their ROAS. These services are critical because they allow companies to set achievable numbers and goals. For example, companies can use Google Adwords or similar services to help determine whether a particular ad campaign is working.

When ROAS falls below a certain level in certain areas, companies may be able to target those campaigns to improve the figure. For instance, websites that use advertising banners often have a lower ROAS than desired and, as a result, they might consider "pay per click" or "cost per action" types of advertising instead. This can generate a larger profit margin for the ROAS. The ROAS can also be used to track conversion rates—the higher the conversion rate, the higher the ROAS. 

Limitations of ROAS

Reliance on ROAS metrics alone can be misleading. The value of ROAS to a company depends on the goals of the advertising campaigns, the conversion factors, and what is being spent. Some campaigns might have a high ROAS but the company could still end up losing money because the product they're selling costs too much to produce and ship, given the ad budget. This can be particularly true when these costs are combined with the overall cost of the advertising.

However, this doesn't necessarily mean that the marketing effort wasn't successful. The ROAS is only calculated with the cost of the advertising in mind, so other factors that actually eat into profits might not be considered (such as an unanticipated increase in shipping costs).

The average ROAS may also vary from one medium to the next. It may not be effective to compare the ROAS across campaigns, without first looking into average ROAS figures for that medium.

Not all forms of advertisement are as easy to assess individually. Some tools allow a company to judge the effectiveness of online or email advertisements fairly easily, but not all mediums are as easy to track on a detailed basis. For example, it's difficult to determine how many people bought a product specifically because they saw a billboard about it on the highway.

Key Takeaways

  • Return on ad spend, or ROAS, is a formula that helps companies determine the success of their advertising efforts.
  • ROAS is calculated by divided revenue by advertising costs.
  • Since ROAS only accounts for revenue, it may not help companies identify other issues with products, such as high costs of production or shipping.