ROAS is the acronym for Return On Ad Spend and it is a metric that shows the efficiency of a marketing campaign. It’s usually used in the digital environment (e.g. ecommerce), but could potentially be used with traditional advertising also as long as you have the cost and the revenue influenced by your campaign (s).
Recommend reading also about ACoS, another marketing metric which tells us what % of our total sales we spent on advertising.
How to calculate ROAS?! What is the formula for ROAS?!
ROAS can be calculated using this formula*:
ROAS = Revenue influenced by campaign ÷ Cost of campaign
*You may also encounter ROAS as a %.
Example:
Let’s say that you spend $2,000 on a campaign. Once the campaign ended [or while it’s running if you have access to the data], you see that the campaign has influenced $10,000.
To calculate ROAS, you divide 10000/2000= 5.
This means that for $1 dollar that you spent on the campaign, you generated $5 in revenue.
Keep in mind that this is not your profit though, as it doesn’t take into account any other costs related to you making the sale.
Why is ROAS important and how to use it?!
ROAS is essential when measuring the efficiency of a campaign. If you are concerned about revenue and profit, you should ensure that your ROAS is above 1. Otherwise, you may be losing money. Depending on your objective, you may be willing to lose $ and generate a negative ROAS if your objective is creating awareness/consideration for your product or brand.
As a last recommendation, it can be dangerous to use ROAS alone to judge the efficiency of a campaign:
- ROAS can be influenced positively by bidding on branded terms which usually perform much better than generic/category targeting. Make sure that your strategy split reflects your objectives and that you put the effort to understand the metrics. If you are currently using an agency, as them straight away about this, as they may be creating a picture to make them [and the campaigns] look good. If you need help with this, get in touch.
- For awareness/consideration campaigns, ROAS will most likely be below 1 or even negative. This may be also because of the way you are attributing the revenue to your campaign. Last-click attribution is outdated and you should consider using data-driven, linear, or position-based instead that show better the impact that all of your marketing activities have had on generating a sale.
- Use ROAS together with other metrics to determine the success of your campaigns: CVR – conversion rate, CPS – cost per sale are very good in this regards.
If we are to draw a conclusion on ROAS, we would definitely recommend using it. Now that you know the formula, even if ROAS isn’t automatically calculated by different vendors (not available in Google Ads for example), we recommend you calculate it manually to assess the efficiency of your campaigns.
We’ll leave you with this: the higher the ROAS, the more efficient your campaign is.