How to calculate ROAS or Return on Ad Spend
For any business to market its products or services quickly and spread the word in a relatively short amount of time, paid marketing is the way to go.
Spending money on paid advertising can turn out to be an expensive affair depending on when, where, what, how, and who you are marketing to.
This makes it essential to calculate ROAS also known as ‘return on ad spend.’
What Is ROAS?
Return on ad spend is nothing but the revenue you get for the amount you pay for advertising on a particular channel or your overall ad expenses.
This metric is an important one for any marketing team and the business owner to be aware of. Knowing this value helps you understand whether the advertising strategy works or not.
Accordingly, you can see whether you need to tweak your strategy to gauge how and where you should spend on ads to get the best possible results.
A ROAS calculation can be done whenever needed as long as the relevant data is available to you.
ROAS vs ROI
ROAS(Return on ad spend) and ROI(Return on investment) are quite similar but there are differences between these terminologies.
While ROAS is specifically meant for marketing and advertising efforts, ROI is calculated for any form of investment made by the business.
The purpose of both these metrics is to measure, but they measure different aspects of a business in relation to the revenue they generate.
ROI measures profitability in terms of the whole business whereas ROAS measures profitability only in terms of ad expenditure.
Both these metrics are useful for an organization to gain insights from their business activity and utilize budgets in a better way.
How do you calculate ROAS?
ROAS calculation occurs using the following formula:
ROAS = Revenue/Advertising Costs
Let’s take an example to understand this better.
Let’s assume you have an e-commerce business and you spent $2000 as your total ad expense including the cost of advertising on a platform, the cost of getting creative material ready to advertise, and other fees including the cost of management and resources.
Through all of these efforts, your e-commerce business generated 200 leads that got you a total revenue of $7000.
So if you divide the total revenue that you generated from ad spending by the cost of advertising you would get:
ROAS = $7000/$2000 = $3.5 : $1
This means that you got $3.5 for every dollar spent. ROAS can also be referred to in terms of percentage. All you have to do is multiply your ROAS value by 100.
So in this case that would be 3.5 x 100 = 350%.
To accurately calculate ROAS, you must have the exact values of how much you spent on advertising and how much revenue you generated from the channel that you advertised on.
Without these two numbers, you would not be able to correctly know your ROAS.
What is good ROAS?
A good ROAS value will always be one that is higher than 1 or 100%. Anything below that and your business has basically spent more than it has earned on particular advertising activity.
Different industries also have different averages of what is an acceptable ROAS for their kind of business.
There are many factors such as advertising cost, the market, and what your goals are that will determine whether you consider your ROAS to be good, average, or excellent.
It is always important to optimize as much as possible so that you earn more than you spend and make your business profitable.
Reasons to calculate ROAS for your business
1. Measure the effectiveness of your marketing
While organic marketing is an option, it takes time to build and grow. So a business can’t really survive without paid marketing.
But, to do this effectively, you must know whether your paid marketing efforts are generating results and revenue for you or not. ROAS is one such metric that helps you know the cost-effectiveness of your advertising efforts.
2. Help allocate your marketing budget more effectively
Using ROAS, once you know what is working and what isn’t, you make better decisions in terms of how to allocate and spend the marketing budget that has been allocated.
Rather than dividing expenses equally on all channels, you can divide the budget for advertising expenses on channels that give you the best returns and give other channels a low priority.
3. Assess the performance of your marketing campaigns
Apart from a macro business standpoint and whether your marketing campaign is bringing in revenue or not, ROAS also helps you analyze the effectiveness of your marketing in terms of marketing metrics.
For example, if you have a business in the B2B space with a relatively long sales cycle, and you don’t exactly see the results of your campaigns immediately in terms of revenue.
But, you have the number of leads and an average revenue value that a lead helps you generate, then you would still be able to know whether your cost per lead was good or not.
Considerations when calculating ROAS
Advertising costs that you incur are not as straightforward as just the amount you pay for a particular channel such as Facebook ads, Google ads, or the cost of putting up a billboard.
There might be other costs associated with advertising such as partners or vendors you deal with who you need to pay a commission in order to get the work done.
If you have an in-house team, their salaries should also be considered when you calculate the return on ad spend.
If you do not include the cost of management and other resources you pay for advertising, then you will not be able to derive an accurate ROAS.
If your business has an affiliate marketing program and you want to calculate ROAS for this channel, then you must also consider the commission you have to pay your affiliates in your advertising cost.
Ways to improve your ROAS
1. See the spend areas you can cut back
Advertising very often is not a linear transaction. You end up burning quite a lot of money before people give you their attention and move down the funnel to become prospects you can sell to.
You must find ways to reduce this and target people efficiently who respond to your advertising rather than just burning money on impressions.
2. Make sure to target the right audience
Your industry acumen and understanding of who your target audience is will have a direct impact on whether your advertising works and reaps you a positive ROAS.
For digital channels specifically, when you see that your ROAS for a particular audience is decreasing over time, try advertising to lookalike audiences to keep your ROAS consistently positive.
3. Track your ROAS over time
ROAS calculation is not a one-and-done activity. You must do it over a period of time for the same or different advertising efforts to know what is working and what is not.
This will in turn help make better decisions going forward regarding the type of advertising you should be investing in.
4. Test different ad strategies and creative
Another way to improve your ROAS is to test different ad strategies and creatives. See what type of media people engage with and respond to more. Is it images, carousels, or videos?
Try out different forms of media advertising and gauge what people interact with the most and whether it gets you business.
As important as it is for your business to calculate return on ad spend, it is also important to make sure that your marketing budget is being utilized without any leakages.
Related read: Importance of departmental budget
Accidental spending or spending more than what was planned is a major issue on digital advertising channels.
To control this, you can use virtual corporate cards from Volopay. Here’s how virtual cards help in managing and controlling marketing expenses:
• You can create unlimited virtual cards and easily manage all types of marketing expenses from a single dashboard.
• Each card can be set with custom budgets so that you never face a situation where you are charged more than what you planned for a particular channel.
• Using a virtual card for online advertising expenses is much safer.