What Is Return on Ad Spend (ROAS) and How is it Calculated?
Analyze the benefits of advertising by calculating ROAS
Return on advertising spend, or ROAS is a term used in the world of advertising to describe the profits made by, and attributable to, advertising campaigns. The goal of the calculation is to measure the effectiveness of a marketing campaign.
Formula for ROAS: Revenue / Cost = ROAS
The formula is quite simple. You simply divide the revenue that is produced by advertising by the dollar amount that is spent on that particular advertising to arrive at your ROAS.
Analyzing the Costs of Advertising
You can analyze the costs of advertising with the profit shown by the ROAS—as opposed to just the income—because the actual price for advertising has to be subtracted first. Most of the time, advertisers will be concerned with having a high ROAS to ensure that they're making enough money. Tracking the ROAS for a company is also critical because it shows whether or not certain types of advertising are worth the money that is spent on them.
Understanding if a form of advertising (such as billboard or digital) is working to bring in sales is incredibly important for businesses—and knowing the ROAS allows companies to determine whether their efforts at marketing (in a particular area) and the money they've invested are being put to the best use. A business' success can depend on the ROAS being profitable (especially in regards to a new product launch), and many times companies need to know at the onset 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 to advertise on, an ill-conceived campaign can amount to hundreds of thousands of lost dollars.
Improving Your ROAS
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.
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. Companies can also determine whether a particular ad campaign is working by using Google Adwords or similar services.
The Bottom Line
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).
That said, ROAS can be extremely helpful for businesses when it is used correctly. It can help determine whether the advertising campaign being used is resulting in a profit—sooner as opposed to later.