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Return on advertising spend, or ROAS is the amount of revenue earned from an advertising campaign. The goal of this calculation is to measure the effectiveness of your ads.
To calculate return on ad spend, use this formula:
ROAS = (Revenue From Ads) ÷ (Total Cost of Ads)
This is an easy formula to follow. You simply divide the revenue produced from your ad campaign by the total amount of money spend for advertisements to get your RAOS.
Let’s say you spent $1,000 on a Coupon Campaign for one month. During this month, your campaign generated a revenue of $6,000. This would make your return:
$6,000 ÷ $1,000 = 6:1 or 600%
A return on advertising spend of 6:1 indicates that for every dollar spent on Coupon Campaigns, you get $6 in revenue.
Why RAOS Calculation Matters
RAOS is essential for having a quantitative evaluation on the performance of your ad campaigns. When combined with customer lifetime value, RAOS insights provide data for making key decisions on future budgets, marketing strategy, and overall ad campaign structure.
Key Point: Calculating ROAS allows e-commerce companies to make better decisions on where to invest their ad dollars and how they can be more efficient.
Remember These When Calculating ROAS
Advertising incurs a variety of fees hidden in the final payment charged to your account. To calculate the real costs of your advertising campaigns, don’t forget to consider these:
- Affiliate Commission. The percent of commission paid to affiliate, as well as, network transaction fees.
- Clicks & Impressions. Use metrics like cost per click, the total number of clicks, average cost per thousand impressions, and the number of impressions purchased.
- Partner/Vendor Costs. These are fees and commissions for associated partners and vendors that assist with your campaigns. For example, if you hired us to manage your campaigns, this cost should be included in your calculation.
Optimize for ROAS NOT Conversions
Conversions alone won’t reveal the accuracy of a campaign’s success. For example, a common metric used to determine the success of a paid search campaign is cost per acquisition or CPA. This metric lets you measure the volume of conversions against the average cost associated with a single action.
Let’s look at an example side-by-side:
Two ad groups have a budget of $50 and both achieve 1 conversion. If they have an identical cost per conversion of $50, we see a different story when evaluating the revenue totals. Ad Group #1 earned $25 while Ad Group #2 earned $150, giving a ROAS of 0.5 and 3.0, respectively.
This is a significant difference in return for the exact same ad spend!
When you have a ROAS that is less than 1, this indicates you are losing money. You are earning less than $1 for every $1 spent. Whereas anything above 1 is money earned, such as in the example above with $150 being earned for every $50 (that’s a 200% return!).
What is a Good ROAS?
What does a good ROAS look like?
You can calculate your ROAS, but how do you decide to make marketing decisions to improve while eliminating those that burn your budget?
As a general rule of thumb, here are a few guidelines to follow:
- 1< ROAS. You’re losing money. Maintaining a 1< ROAS is only going to chew up your ad spend and increase your burn rate. Rethink your approach and try again or get some help.
- 1-3X ROAS. You might be earning money or struggling to break even with your overall business expenses. Reevaluate your advertising strategy and continue to find ways to improve.
- 4X ROAS. Congratulations! Your advertising efforts are (likely) turning a profit.
- 5+ ROAS. You’re optimized your ROAS and things are looking very good.
For your business, a profitable ROAS may be a much higher number. Overall, ROAS is influenced by profit margins, operating expenses and the overall success of your business. In general, a good ROAS to aim for is a 4:1 ratio, or $4 for every $1 spent on ads.
Every business is different. A start-up may require a significantly higher ROAS just to break even and cover their costs. While small e-commerce could manage a smaller ad budget and enjoy a healthy return on a 3:1 ROAS.
Key Point: If you have large margins, you can survive on a low ROAS; if you have a small margin, it is essential to maintain low advertising costs𑁋and, you are required to achieve a higher ROAS to be profitable.
Improve Your ROAS
Here’s what that looks like:
- Eliminate friction in your sales funnel. Determine where visitors who click on your ads lose interesting in your offer. Make the necessary changes and modifications to convert more into paying customers.
- Use upsells and add-ons to sell more. If your checkout offers additional value and incentive to buy more, include this in the check out process.
- Reduce abandoned carts/payments. Analyze how to optimize your checkout process to push more prospects to the final payment.
Conversion rate optimization should be an ongoing commitment at your business. Every tweak, modification, and test should be tracked using an analytics tool.
Some areas you could focus on to improve ROAS include:
- Improve mobile-friendliness/speed of your website
- Analyze competitors’ for consumer insights
- Refine your keyword targeting
- Use geo-targeting
- Modify landing page headline, copy, images, etc.
- Promote seasonal offers
There are many ways to improve both your conversion rate and your ROAS. If you’d like to have a strategic discussion about your business, send us a message. Let’s identify the areas of your business to optimize to improve the performance and profitability of your ad spend.