What Is ROAS and Why It Matters in Marketing?

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In the world of marketing, metrics play an important role, and return on ad spend (ROAS) is one of the most useful metrics. Marketing is a department that is plagued by mathematics and data analytics. In this competitive business landscape, data is the one thing that gives marketers the edge. It gives them the chance to optimize their campaigns, improve them in real time, and assess their efforts to plan for the future. 

Return on ad spend (ROAS) is one of those metrics that lets marketers do all this and more. Most metrics give marketers a big picture of their marketing efforts. ROAS is one of the few that can be scaled down to assess a single ad or creative. 

But what is ROAS? In this article, we’ll study what ROAS is and where it stands in marketing.

What is ROAS?

ROAS is one of the most important marketing metrics. It stands for return on ad spend. In simple terms, it is the revenue you earn from each dollar you’ve invested in advertising. 

Return on ad spend sounds awfully similar to another important metric used by businesses, ROI. And that’s because it is. ROI is the measure of revenue earned from all investments. ROAS is more specific and only pertains to investments made in advertising. Both serve the same purpose, which is to measure how fruitful an investment has been. 

The metric works in a very simple way. It compares how much money was spent on an advertising campaign or a specific ad with how much money was earned from them. It’s obvious that the higher the ROAS, the better. 

As such, it can also be concluded that ROAS is a direct indicator of the effectiveness of a campaign. Your advertising efforts will be effective when you’re able to connect with potential customers and convince them to make a purchase. The more people your campaign connects with and the deeper the connection, the more revenue you will earn. And, consequently, the higher your ROAS will be.  

How Do You Calculate ROAS?

As complicated as the marketing metric seems, it’s actually quite simple to calculate. Let’s look at the definition of ROAS once again. It’s the money you earn for the investment you’ve made in advertising. This means it’s the ratio of revenue to cost. To calculate ROAS, simply divide your revenue from an advertising campaign by its cost. 

ROAS Marketing Calculation Formula (Source: Instapage)

For example, a company spent $5,000 on an advertising campaign for a new product. The conversions from the campaign led to two hundred and fifty products being sold at $100 each. The total revenue from the advertising campaign was $25,000. For the ROAS, we divide $25,000 by $5,000, which is five. A ratio of five to one is their ROAS. 

This means that for every dollar the company spent on advertising, it earned five dollars back. 

There are different ways that companies track their advertising costs. Some only use the actual money they’ve spent on the ads themselves. Other companies take a more in-depth approach and track any additional costs they might have incurred. There are always extra expenses incurred for every campaign. 

The biggest cost is the wages of the advertisers, who did all the work. These may be in-house advertisers or an outsourcing agency. There is also the vendor cost, which is the commission for any vendor associated with the ads. Lastly, if you worked with an affiliate program, you also had to pay the affiliate network fee. 

All of these costs add up to the actual dollar amount spent on an ad campaign. Using them when calculating ROAS can give you a more holistic and accurate picture of your ad campaign. 

Why Does ROAS Matter?

Return on ad spend is a more critical marketing metric than most people realize. It answers one of the most basic questions marketers have: Was this campaign a success? A campaign may bring in top dollars and seem pretty successful on the surface. But high revenue doesn’t always mean success. 

Let’s take the above-mentioned company as an example. They had a high ROAS because their revenue was much higher than what they had spent on the ad campaign. But imagine they had hired a UX designer to work on their mobile ads for the duration of the campaign. And they charged the company $20,000 for three months of work. 

The company still generated quite a bit of revenue, and it still seems successful. But their costs are equally high. And their new ROAS is one. This means they simply earned every dollar they spent on the campaign. There were no profits, and the campaign can’t be considered a success anymore. 

Return on ad spend proves to be a very valuable metric in decision-making. Looking at ROAS can tell advertisers and marketers where they need to invest more of their resources and where they should pull out. 

Combining ROAS with forecasting and data analytics can be very beneficial for decision-making. For example, your analytics conclude that ads that generate a third of their cost in the first week will be very profitable by the end of the campaign. With this information, you can cut spending on underachieving ads after the first week. This will help keep your ROAS positive. 

ROAS is just one metric and can’t give you the entire picture of your advertising campaigns. To get the most out of your ROAS, you’ll have to use it with other marketing metrics like CPC, CPA, and LTV. 

Understanding ROAS and ROI (Source: Mayple)

What Is a Good ROAS?

There is one universal fact about the return on ad spend. And that is: a higher ROAS is better than a lower one. But how high is high? How much should you aim for? Where do you draw the line? 

There’s no simple answer to this question. There’s no single ROAS value that every company, brand, or advertiser should be aiming for. Every business and ad campaign is unique, and thus the rules are different for each. So they must set their own ROAS goals. There are a lot of factors that need to be considered before you can decide what your benchmark is. 

In the above-mentioned example, the company had a return on ad spend of five. They may consider it an absolute success. But for other companies, this may be regarded as a subpar result, and the standards may be higher there. 

A lot goes into deciding what a good ROAS benchmark is. You have to look at the industry standards, your competitors, the market, the seasons, and your own financial history. If you have an ROAS of four in an industry where the standard is three and a half, that may seem good. But your financial history says you’ve achieved an ROAS of five. So that’s certainly not good by your own standards. 

The channel you’re using also has a significant impact. For example, buyers on paid search are more meticulous, so it isn’t to get a high ROAS. Buyers on paid social have an impulsive nature, so they often result in higher ROAS. 

If you’re just starting your business or launching a new product, it’s understandable to get a low ROAS. But you need experienced advertisers on your team who have worked with your target market and preferred channels. 

ROAS: Pros and Cons

Like every other marketing metric, return on ad spend has its own set of benefits. Take a look at the pros of using ROAS: 

Discover Effective Channels

Every business uses multiple platforms and channels to run its ad campaigns. But not all of them perform in the same way. Depending on your industry and audience preferences, some channels may show better results than others. If you calculate ROAS for each channel individually, you can discern which is better and distribute your resources more effectively. 

For example, a company is running ads on social media, email, and in-app. Calculating ROAS for each tells them that social media and email are more profitable. This way, they can ditch in-app ads and spend more time on social media and email. 

Eliminate Inefficiencies

Return on ad spend is a very important metric for identifying and eliminating inefficiencies in a company’s marketing operations. If you achieve a low ROAS on any of your ad campaigns, it’s time to take a deeper look into where your money is going. You could be spending too much on vendor fees, the wrong ad creatives, or payroll. 

ROAS will tell you where your money is being wasted, so you can eliminate those inefficiencies. Calculating this marketing metric on a timely basis can help reduce leakages before they affect your bottom line. 

Optimize Campaigns

One of the biggest advantages of calculating the return on ad spend is that it can help optimize campaigns in real time. All you have to do is calculate ROAS across multiple ad creatives. Different ad creatives invoke different results from consumers. By looking at the ROAS of each creative, you can figure out which works best for your customers. 

ROAS can identify which words, phrases, CTAs, or visuals get the best results. Armed with this information, you can optimize ad campaigns that aren’t performing so well. You’ll be able to improve your campaigns as they are running, so you can salvage them and give your customers what they want. 

Accurate Reporting

A major reason why businesses and marketers love return on ad spend is because it’s such a simple metric. An ad is published, and revenue is earned. That’s the whole gist of it. The metric is easy to explain to those who aren’t well-versed in marketing analytics. 

But calculating the metric shows much more than this. ROAS reporting can help show executives what works and what doesn’t. It simply takes out the guesswork and explicitly indicates which marketing efforts aren’t up to par and need to go. 

Better Planning

When you calculate your return on ad spend, you can understand your profitability and margins much better. It gives you the chance to adjust your plans and goals accordingly. Budgeting is an important part of marketing. ROAS can show the most profitable advertising ventures, so more budget can be allotted to them and ineffective campaigns can be halted.  

By reporting these important aspects, ROAS can help executives make more adequate marketing budgets and refine messaging for future endeavors. It can also help marketers show a need for additional staff for their campaigns. 

ROAS Vs. ROI (Source: Click-Wise)

Improve Your ROAS Today!

ROAS is one of the most important metrics when it comes to analyzing how your ad campaigns perform in the market. It is the ratio of the revenue earned from an ad or campaign against how much money is spent on them. As such, it represents the profitability of your ads. Different campaigns may have different goals for performance. But the end objective is the same: to achieve higher revenue at a lower cost. 

Have you calculated the ROAS of your ad campaigns? Let us know in the comments below!

Featured Image: Upwork

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