In today’s data-driven marketing landscape, measuring the effectiveness of your advertising efforts is more important than ever – and that’s exactly what return on ad spend (ROAS) is for.
ROAS allows you to calculate the revenue generated by the money you spend on ads, helping you assess the success of your digital ad campaigns and make informed decisions about your budget allocation.
In this article, we’ll cover what return on ad spend (ROAS) is, how to calculate it and everything else you need to know about ROAS.
What is return on ad spend (ROAS)?
Return on ad spend (ROAS) is a marketing metric used to measure how effective a digital advertising campaign is.
Any online business has to ask themselves the question: ‘For every pound spent on advertising, how much revenue do we generate?’ ROAS answers that question.
ROAS helps online businesses evaluate their advertising strategies and determine what’s working and what’s not – and that makes it much easier to improve their future advertising efforts.
How to calculate return on ad spend (ROAS)
The formula for calculating ROAS is as follows:
ROAS = revenue from ads / cost of ads
For example, let’s say you spend £1,000 on digital ads in a single month. In this month, these ads generate £5,000 in revenue. That means your ROAS is:
£5,000 / £1,000 = £5
In other words, your ROAS is £5, as, for every £1 spent, you made £5 back.
When it comes to expressing your ROAS, the most common way to do it is as a ratio showing what you made against what you spent. In the case of the example above, your ROAS would be written as 5:1 – £5 revenue for every £1 spent.
Some prefer to express their ROAS as a percentage. If that’s you, simply multiply your result by 100. In the example above, your ROAS would be 500%.
Why ROAS matters
ROAS helps answer an essential question that every company asks themselves: ‘Are my digital advertising efforts actually worth it?’
Some of the areas where ROAS makes a difference include:
- Performance benchmark: ROAS gives a direct indication of how well your advertising efforts are performing, helping you understand how effective your campaigns are.
- Budget allocation: High ROAS indicates that an ad campaign is profitable. This helps guide you in allocating more of your budget to campaigns that’ll give you more value for your investment.
- Optimisation insights: ROAS highlights areas where your campaigns may need tweaking to improve your performance. For example, if you’re targeting the right audience but your ROAS is low, the ad creatives may not be resonating with your users.
In short, your ROAS contains a lot of valuable information about your digital advertising efforts – and that’s exactly why it matters.
What’s the ideal ROAS?
The ideal ROAS varies by industry and business model. It probably goes without saying that you want a ROAS value greater than 1 – that means you’re at least recouping your ad spend.
While there’s no universally ‘good’ ROAS, however, for e-commerce a ROAS of 4:1 or higher is often seen as a solid benchmark.
What can affect your ROAS?
Your ROAS can be affected by a number of factors that vary depending on your industry, ad platform and campaign strategy. These include:
- Platform: Different advertising platforms – Google, Facebook, LinkedIn, TikTok etc. – have unique audiences, bidding structures and ad formats, all of which can affect your ROAS.
- Relevance: Most platforms like Google and Facebook use relevance or quality scores to determine how well an ad fits the audience’s interests. Compelling ad creatives tend to drive more traffic that’s likely to convert while bland or unclear ads may struggle to perform and lead to lower ROAS.
- Conversion rate: The percentage of users who complete a desired action – a purchase, sign-up etc. – after clicking your ad is directly tied to your ROAS. For example, a slow or confusing landing page can cause users to bounce while an optimised handling page can improve your conversion rates and, in turn, your ROAS.
- Cost per click (CPC): If you’re paying too much per click and the conversions don’t justify the cost, it’ll have a negative impact on your ROAS. For instance, high keyword competition on Google can lead to an inflated CPC.
And many more. It’s important to carefully analyse these factors and make adjustments to ensure your advertising efforts are actually bringing in the value you’re looking for.
Wrapping up
ROAS is a crucial indicator of how your digital advertising efforts are going. It gives you valuable insights into the profitability of your campaigns and helps you monitor and improve your audience targeting, ad creatives and much more.
By leveraging ROAS, you can make smarter, more informed decisions that drive sustainable growth and long-term success for your business.
