What Is ROAS? How Do You Calculate Return On Ad Spend

Calculating ROAS (return on ad spend) is necessary to assess your digital marketing progress. It lets companies gauge the success of their marketing efforts and refine their advertising plan to boost their profits. When business owners know the value of ROAS for their paid ad campaigns, they can refine or stop efforts immediately that are yielding poor returns on ad spend — and grow or extend the campaigns to deliver a healthy ROAS.

Comprehending how to gauge the return on ad spend is also critical for assisting a business in calculating its actual customer acquisition cost or CAC. ROAS is important for digital marketing strategy development.

We will discuss the correlation between ROAS and CAC in this blog and offer a rundown of various tools for estimating ROAS and suggestions for how to enhance it.

Without further ado, let's discuss what is ROAS and how you can calculate it.

What is the Return on Ad Spend?

ROAS is a parameter that measures the success of a digital advertising campaign. It is the amount of money you earn by a marketing or advertising campaign matched against the cash spent on that campaign. It aids online businesses in assessing which techniques are bearing fruits and how they can boost future promotional efforts.

It estimates the return on investment gained for each dollar you pay out on advertising. By measuring and tracking ROAS, you get information about the efficacy of your marketing. You can measure return on ad spend for a broad range of marketing projects. It can include gauging ROAS on single projects or ads to measuring ROAS on monthly campaigns or for a full year’s worth of ad spend.

Return on Ad Spend Formula

The calculation of return on ad spend could seem like a straightforward process on the surface, but it requires diving into the minute details of an ad campaign. Here is the formula to calculate ROAS.

Return on ad spend = Profit received from advertising / Expense of advertising.

To better demonstrate return on ad spend calculation, suppose a business spent $1,000 in marketing, which led to creating sales of $5,000 in ROI. The ROAS could then be calculated with the help of the above formula:

ROAS = $5,000 / $1,000

ROAS = 5:1

It means that the business gets 5 dollars in profits for every dollar spent on advertising. The ratio created could either be shown as a numerical value or a ratio, which shows that every dollar spent on marketing generates $5 in profit.

How to Find Revenue Attribution to Estimate ROAS?

It could feel challenging to find what gains you can attribute to your advertising campaign. First, you should have access to resources that enable you to assign sales to ads. There are various models you can employ to get this data.

The single-touch attribution model allocates profit to one of the two touches before someone converts. With first-touch attribution, you are supposing the consumer purchases a product/service after the first ad they watched.

Last-touch attribution, on the other hand, offers credit to the last advertisement the consumer saw. Multi-touch attribution assigns approval to all touchpoints which is why usually called a more precise, helpful model.

You also need to find the expense of the advertisements for ROAS calculation. Plus, you have to pay commissions and fees to partners and vendors apart from the money you spend directly on the ad platform. If you don’t add these extra costs, your return on ad spend will be artificially higher.

It means that you need to be consistent in your reporting. If you add the additional expenses when estimating ROAS, you will need to include them again when you are calculating the next time. When you refine your ad campaigns, this guarantees that your higher return on ad spend relies exclusively on the tweaks you made.

Why Do You Need to Calculate Return on Ad Spend?

Companies need to establish if an advertising campaign is working. Monitoring and estimating the return on ad spend is an efficient method to recognize opportunities where you can lower ad spend (on low-ROAS programs) and areas to “double down” (assigning more capital to high-ROAS programs).

You can employ various approaches to optimize for return on ad spend. One technique is to launch various campaigns simultaneously, doing ROAS calculations for each. The bad-performing campaigns can be stopped, while more budget is allocated to the campaigns that are yielding great performance. You can establish future advertising direction and boost efficiency with ad spend by using insights you got from calculating return on ad spend.

What Is A Good ROAS?

A good return on ad spend relies on several aspects, like your advertising goals. For example, if you want to boost brand awareness, ROAS will be low because awareness does not usually attract immediate conversions.

A decent ROAS also varies from industry to industry. Some sectors need a healthier ROAS for the advertising cost to be considered high. For instance, a higher return on ad spend may be expected with businesses that possess a low customer lifetime value (CLV). More upfront profit makes up for the fact that less ROI is produced over the customer’s lifetime.

Most businesses choose 4:1 as the criterion for their ROAS calculations. It means that a business yields 4 dollars in profit for each dollar they spend. The right ROAS criterion can be different for different sectors.

Bottom Line

We hope you liked our piece and now know how to calculate return on ad spend for your advertising campaigns. ROAS is crucial as it enables you to analyse your marketing campaign’s performance. Business owners need to understand this parameter to check if their advertising efforts are bearing any fruit.

It's particularly significant for businesses that use digital marketing strategies like e-commerce businesses. It aids them in understanding their revenue margin as compared to their marketing efforts. So, if you are a business owner who uses digital marketing, you should understand and calculate ROAS. An affordable Google PPC services provider can help you run advertising campaigns and track their progress.