Whether you rely on digital advertising or traditional methods such as TV commercials, print ads, and billboards, the costs can be substantial. To ensure efficiency, you need to balance advertising expenses with the potential revenue an ad campaign might generate.
One way of determining whether different campaigns are cost-effective is by calculating the return on advertising spend (ROAS). Read on to learn more about ROAS, how to calculate it, and tips for increasing it.
What is return on ad spend?
Return on ad spend (ROAS) is a powerful metric used to measure the amount of revenue a business earns for each dollar spent on advertising campaigns. The dollar amount is the profit generated (or lost) through investment in advertising.
As with other key performance indicators (KPIs), you can use it as part of evaluating your organization’s total advertising expenditures, specific ad campaigns, multiple ad campaigns, or even a specific ad.
How to calculate ROAS
Calculating ROAS requires following a simple formula. The marketing metric looks at revenue attributable to ads divided by the cost of producing and placing those ads. Here’s how to calculate ROAS:
1. Determine attribution
Determining what revenue you can attribute to an ad campaign can be a complicated process because there are different ways to arrive at this number. The two basic models are:
This model credits revenue to either the first touch or last touch before a conversion. Touches are customer interactions with ads. With first-touch attribution, the assumption is that the customer converted into a sale after their first ad interaction. With last-touch attribution, credit for the revenue goes to the last advertisement with which the customer interacted.
Multi-touch models divide credit for a conversion between all customer touchpoints. Since they account for every touch, these multichannel attribution models can give you a more accurate picture of which ads influenced a customer to make a purchase.
Businesses can leverage programs and ad platforms to track conversions from touches. A popular option is Google Ads, which can track actions customers take on your website or ecommerce business after clicking on one of your ads. Google Ads reports which purchases are attributable to which touch.
2. Establish cost
You also have to determine the cost associated with ad spend to measure ROAS. While listing fees are a part of an advertising budget, there are other factors to consider including:
Partner and vendor costs
You may hire third-party professionals or agencies to help produce and place paid advertising. You may also have employees who work on these advertising efforts in-house, resulting in salary costs. Without incorporating these costs into a ROAS calculation, your ROAS figure may not accurately reflect the business success of your ad campaign.
A business doesn’t always retain all the revenue generated by an ad. Ad partnerships with affiliate marketers, such as social media influencers, means companies split revenue earned, with the affiliate receiving a commission.
Clicks and impressions
There are hidden costs in touchpoints, such as cost-per-click (CPC) and cost-per-thousand views or impressions (CPT) ads. CPC ads bill advertisers based on the number of times users click. In addition to a flat listing fee, website owners may get a cut of advertising revenue based on CPC. CPT operates essentially the same as CPC but is based on passive ad impressions. This is particularly relevant for advertisers who place ads within YouTube content.
3. Use the ROAS formula
The formula for return on ad spend is:
ROAS = (R / C) x 100
R =Revenue attributable to ads
C =Cost of ads
For example, a business is running an ad campaign that costs $1,000 to produce and place. The business can identify $2,000 in revenue attributable to those ads. Here’s how to measure ROAS:
ROAS = (2,000 / 1,000) x 100
In this case, ROAS is 200%. The more effective the ad campaign is in generating sales or revenue, the higher the ROAS percentage. Conversely, the less effective the ad campaign, the lower the ROAS percentage.
You can also frame ROAS as a ratio. A ROAS of 200% would be 2:1, or $2 of revenue for every $1 spent on ads.
What are the differences between ROAS, ROI, and CPA?
ROAS and ROI are similar. ROI is the concept underpinning ROAS, and ROAS is simply a more specific calculation. Whereas ROI generally evaluates the revenue generated by a business expenditure, ROAS focuses on revenue earned by ad spending.
CPA, on the other hand, looks only at the cost involved in acquiring a customer. This can be a conversion through an ad touchpoint, a newsletter sign-up, or some other channel. CPA does not evaluate the revenue generated by a conversion.
Tips for increasing ROAS
For marketers, the goal is to avoid spending more on ads than they generate in revenue. An ideal ROAS is usually at least a 4:1 ratio—$4 in revenue for every $1 in ad costs.
If your ads or campaigns are falling short, there are a few thing you can try to increase ROAS:
Improve ad targeting
Ensure you target the right customer base with your ads by using relevant keywords and ad groups. Target specific demographics, geographic areas, and interests.
Optimize landing pages
After clicking an ad, potential customers should end up on landing pages that are relevant, easy to understand, and simple to navigate. You should also optimize so they can follow through and make a purchase, resulting in ad-generated revenue.
Use negative keywords
Negative keywords can be included in your ad targeting to prevent your ads from appearing in irrelevant searches or in front of audiences who aren’t likely to purchase your product or service. For example, if you own an online shop that sells dressy shoes, you can use negative keywords like “sneakers” and “tennis shoes” to avoid showing up for users who want casual shoes. This can help with improving ad targeting as well as click-through rate.
Test different ad formats and placements
Try different ad formats, content, and placements to see what results in the most revenue. Use ad extensions to provide more information about products or services to would-be customers to encourage conversions.
Track ROAS over time and make adjustments
Track your ROAS results over time to see which strategies are working and which are not. The more data you have, the more easily you can pinpoint how to adjust campaigns, how to allocate more budget, and what overall investment is required to improve ROAS.
Decrease ad-related overhead
Perhaps it’s cheaper to hire an ad producer and media buying staff in-house than to contract an outside agency. Or you can limit your campaigns to static imagery over fully produced videos to save on additional costs.
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Return on ad spend FAQ
What is a good ROAS?
A high ROAS is good, while a low ROAS means there’s room for improvement. On a more granular level, an acceptable ROAS is a ratio of at least 4:1, or $4 of revenue for every $1 spent on ads.
How can you calculate ROAS?
To calculate your return on ad spend, first add up the total amount of revenue attributable to ads, then divide the number by the total cost of your ads. Finally, multiply the product by 100 to get a percentage.
How can you increase your ROAS?
You can increase your overall ROAS by reducing costs associated with producing and placing ads, or by revamping your advertising plan and marketing strategy to encourage a higher rate of conversion and more revenue retained as profit margin.