Measuring Return On Ad Spend
Paid advertising is a big portion of your digital marketing strategy. Here’s how to measure return on ad spend.
Return On Ad Spend Formula
If a business spends $1,000 on email marketing and receives $10,000 in business, its ROAS is 1,000%. “Return on Ad Spend” is an extremely simple metric. The Return on Ad Spend formula, at its least complex, is:
[Revenue from Ad Spend] / [Ad Spend] x100= ROAS
The ROAS will be expressed as a percentage because it’s the percentage of advertising dollars that is being returned. Of course, this ROAS formula is very simple, but the metrics involved can be far more complex.
Marketers use ROAS to determine how effective their advertising campaigns are, where they should be investing, and how much they should be investing. Marketers may use ROAS to see that their email marketing campaigns are many times more effective than their web campaigns or that they were very effective but are now flagging. As with any metric, ROAS can tell marketers many things. ROAS is often best used when comparing the productivity of different marketing methods.
But while ROAS can appear to be straightforward, it often isn’t. Consider an organization with multiple marketing campaigns — TV, print advertising, cold-calling. It is nearly impossible for the organization to determine which channels revenue is coming from. This is especially true in the digital age, when marketers may be managing multiple social media platforms alone. ROAS works best when organizations can properly track their buyer’s journeys — but it also still needs to be understood that under any multi-channel marketing campaign, multiple channels may ultimately lead to sales.
Most marketing platforms today will track ROAS as a key metric. As long as an organization’s ROAS spend is good, the organization knows that its marketing dollars are being put to good use. Furthermore, organizations can identify down-trends in their ROAS early, such as market saturation. This allows for shifting to different marketing tactics and techniques when one marketing strategy appears to have been exhausted or presents diminishing returns.
ROAS Definition
Before getting into the intricacies of ROAS marketing, it’s important to have a deeper understanding of the ROAS definition. ROAS refers to “Return On Advertising Spend.” For every dollar you’ve spent on advertising, how much revenue are you building?
ROAS has some tremendous business implications. If your ROAS is going down, then you may have saturated the market and may need to move on to a different channel. If your ROAS is going up, you’re doing something right; you may even want to spend more to get better results. If your ROAS on one channel is better than another, you may want to shift your advertising dollars. If your ROAS has improved on all channels since adding a different channel, it could be that you’re experiencing a high level of cross-channel marketing.
It’s easy to see why ROAS is so important. But what’s often more critical is how it should be tracked and who should manage it. To be useful, the organization needs to be aware of its advertising spend and how it is bringing revenue in.
When it comes to eCommerce and brick-and-mortar, this is easy; you can separate your advertising spend and profit and revenue based on whether your sales came through the eCommerce channel or the store. But when it comes to something such as distinguishing Facebook purchases from your online store purchases, it becomes a little more complex. You need to use your technology to your benefit, such as tracking tokens.
ROAS is very similar to ROI. In fact, ROAS is essentially Return on Investment but cast only in an advertising light. ROAS is generally looked at by advertising, marketing, and sales departments, and it must be thoroughly investigated. As with many metrics, its power is internal. It is often not useful to compare one company’s ROAS to another company’s ROAS because there are so many methods of advertising and so many types of companies. Rather, it’s better to compare a company’s ROAS to the same company’s ROAS, in different quarters.
When tracked correctly, ROAS marketing is incredibly powerful. Organizations are able to learn a lot about their advertising dollars and where they should be applied. At the same time, though, the organization does need to consider its growth patterns — ROAS can allow an organization to grow very quickly, even more quickly than is prudent. Looking at ROAS can help organizations maintain better, more stable advertising spending, and can help keep advertising budgets as lean as possible.
ROAS vs. ROI
Let’s take a deeper look at ROAS vs ROI.
Return on Investment and Return on Advertising Spend is essentially the same tactic but applied differently. ROI is calculated as:
[Profit – Costs] x 100 / Costs
So, when a company spends $1,000 and gets $10,000 back, it has a ROAS of 1,000%. But it has an ROI of 900%. That’s still good. But it’s a little less. This is because ROAS is comparing the gross amount of profit. The ROI is comparing the profit less the costs.
In reality, whether you use ROAS or ROI is not likely to matter. What matters is that they cannot be used interchangeably. Companies need to decide whether they are going to calculate the “ROI of advertising spend” or whether they are going to devote themselves to the “ROAS” instead. Because ROAS is generally used internally rather than externally, all that’s important is that apples-to-apples comparisons are being drawn.
Of course, in most industries ROI is the leading factor, which means you may find it easier to compare yourself with other organizations if you’re looking at the ROI of their advertising. ROI can still be useful, but it’s important to note how different it could be compared to the organization’s ROAS. If organizations your size are receiving 1,000% ROAS for certain advertising channels and your organization is receiving 800% ROAS for certain channels, it probably isn’t notable. If you’re receiving 100%, on the other hand, it becomes important.
Note that when a company spends $1,000 and gets $10,000 back, the difference is slight; 1,000% vs 900%. When a company spends $5,000 and gets $10,000 back, the difference is more substantial: the ROAS is 200% and the ROI is 100%. While they are measuring similar things, it must never be forgotten that they are still measuring different things. ROAS is measuring the total returns that you’re getting back, regardless of how much you had to spend to begin with. ROI measures how much you are getting back compared to the amount you have spent. A company may have a decent ROAS and a great ROI or vice versa. Neither ROAS nor ROI are more inherently accurate, they are just measuring different things.
But, of course, any time the ROI or ROAS is running into positive numbers, it’s a good thing for the organization. As long as the organization is able to keep these numbers high, it can continue investing effectively in marketing. Ideally, close tracking of both ROI and ROAS will be instrumental to ensuring that the organization continues to invest in the advertising techniques that are working best for the organization.
What Is A Good ROAS?
Asking “What is a Good ROAS?” is an almost philosophical question. ROAS is primarily used for internal benchmarks rather than industry-standard benchmarks; let’s look at the internal benchmarks first.
When considering internal benchmarks, a good ROAS is a ROAS that either meets or exceeds the previous ROAS. An organization should have a thorough history of its average ROAS and be able to tell whether channels are increasing or decreasing their returns. Through this knowledge, the organization can make decisions about its future. Every organization goes through periods of down-cycling and up-cycling, but the organization’s ROAS must be stable rather than volatile.
But there are ways to consider external benchmarks, too. ROAS can be compared among other similar companies in size and industry. ROAS can vary tremendously from company to company. For instance, a company with high-value, high-margin luxury goods will always have better ROAS than a company that deals in bulk, high-volume, low-margin goods. That doesn’t necessarily indicate that the company dealing with bulk, high-volume, low-margin goods isn’t performing to its best, or even making the best money.
Market and industry matter. There’s no objective “best ROAS.” It depends not only on the company but also its audience. Some organizations may find it more difficult to sell to their audience (younger audiences tend to be more skeptical of marketing), while other organizations may find that most of their customers are well-educated and ready to commit (B2B sales often occur when the buyer already knows what they want).
For most companies, a “good” ROAS will be defined by their past performance, rather than the performance of other companies — even other companies within their industry.
ROAS Calculator
If you’re interested in a ROAS calculator, there are many of them online. But the ROAS calculations are so simple that you probably don’t need a calculator. If you want to know ROAS, you really just have to take the amount that you’ve gained and divide it by the amount of your advertising spend. It’s deriving those numbers that can be more complex. With the right accounting management system, you should have a solid handle on how much money you bring in. But you also need to know which channels they’ve been brought in from — which advertising dollars led to the commitment. This requires comprehensive tracking of sales funnels.
For eCommerce shops, a significant amount of this tracking is done through cookies and click IDs. Organizations online are able to see exactly what customers do from the start to the finish of their journey. But because cookies are going away shortly (many entities are banning third-party tracking cookies), it may become more difficult for organizations to see through all online channels. This could require further data gathering on behalf of the companies.
In addition to a general ROAS calculator, organizations may be interested in an ROAS ratio calculator or a break even ROAS calculator. A break even ROAS calculator calculates how much you need. It is:
1 / [Gross Profit – Revenue] = [Break Even ROAS]
So, if you’re making $10,000 but profiting $5,000, your break-even ROAS is 2.00. Your profit margin is 50%. And each dollar that you make has to make you $2 back. Your break-even ROAS is an incredibly powerful tool, because it tells you exactly how much you need to make with your advertising dollars. This can provide you with additional guidance when you are drawing up your advertising plans.
