ROAS, return on ad spend, is an important metric for any business spending money on advertising. Marketing is an investment, so it’s vital to track how your marketing campaigns perform and assess whether they are profitable. Calculating ROAS helps to examine how much you can expect back if you invest X amount of money.
ROAS: Return on Ad Spend
As mentioned above, ROAS stands for return on ad spend. Return on ad spend looks at an ad campaign to evaluate how well it performed. It measures how much money you can expect back for each dollar spent on an advertisement.
ROAS is a great way to assess and adjust your marketing campaigns. You can measure ROAS for different ads to see which performs better, or check in on ROAS as you edit ads to ensure that your ad runs at peak performance.
ROAS vs ROI
ROAS is often confused with ROI, return on investment. While the two metrics are very similar, ROI looks at the overall profit of ads based on the amount spent on said ads. ROAS measures the gross profit for each dollar spent on advertising. Return on ad spend is usually more specific to a single ad, ad campaign, or even specific keyword.
Calculating ROAS is simple: the equation only requires you to divide ad revenue by ad cost.
Revenue / Cost = ROAS
For example, if you spend $2000 on an advertising campaign and it results in $8000 in revenue, you’d have an ROAS of $4, or a ratio of 4:1. For each $1 spent, you received $4 in return for that advertisement.
Why Return on Ad Spend Matters
Return on ad spend is important to quantify how well your ads are performing. Spending money on marketing is necessary for most businesses, but it’s vital that the money spent on advertising is worthwhile. If you spend money on ads that don’t attract new customers or result in profits, then your advertising budget was wasted.
A low ROAS informs you that you need to update or edit your ads. Calculating ROAS can help show businesses which ads work and which don’t, so that they can put more money into ads that perform well and improve the ads that aren’t as profitable.
Use ROAS as a marker for ads as you test out different copy, creative, or targeting. A/B testing ads by assessing ROAS can help you make the most of your advertising budget and improve the profitability of your business.
What is a Good ROAS?
There isn’t one exact ROAS for all businesses; it differs depending on your industry, specific business, products, and more. A general benchmark ROAS to shoot for is 4:1 ($4 for every $1 spent), but some companies find this too low or too high of a goal. Some businesses can afford higher advertising costs, while others need a higher ROAS to keep their overall business profitable.
How you track ROAS depends on the advertising method you employ. It’s easy to know how much you spent on an ad, but it isn’t always as simple to know how much revenue that specific ad generated.
If you purchase a billboard ad, it is hard to track ROAS because you may not know which customers found your business through the billboard. Using digital marketing tactics makes it easier to track ROAS.
If you create an online ad on websites like Facebook or Google, you can track customer clicks and conversions by using tools like Google analytics. An ecommerce site can easily see which ads lead to clicks that lead to sales.
If your business runs out of a brick and mortar establishment, however, site clicks don’t necessarily lead to customers walking in the door. You can try to get an idea of ROAS by asking how they heard of you, sending surveys to customers, or by trying to assess if business picks up after implementing an ad campaign.
The Bottom Line
ROAS is not the only metric to look at when assessing your ad campaigns. Return on ad spend is a useful metric, and if you have the means to track it you absolutely should. The ROAS of ads is not the end-all metric of efficiency of your ads, however. Keep track of other metrics as well and check in on your marketing strategy regularly to make the most of your advertising budget.