What is Return on Ad Spend (ROAS) and How is it Calculated?
Analyze your costs of advertising by calculating ROAS
Return on advertising spend, or ROAS is a term used in the advertising community to describe the profits made by and attributable to advertising campaigns. The calculation measures the effectiveness of marketing campaigns.
Formula for ROAS: Revenue / Cost = ROAS
Divide the revenue that is driven by advertising by the amount that is spent on that advertising to arrive at this amount.
Analyzing the Costs of Advertising
You can analyze the costs of advertising with the profit shown by the ROAS – as opposed to just income –because the actual price for advertising has to be subtracted first.
Most of the time, advertisers will be concerned with having a high ROAS so they can be sure to make money. Tracking the ROAS for a company is also critical because it shows whether certain types of advertising are worth the money that is spent on them.
Knowing if a form of advertising is working to bring in sales is incredibly important for businesses, and knowing the ROAS allows companies to determine whether their efforts at marketing and the money they've spent are effective. A business' success can depend on the ROAS being profitable, and many times companies will want to know right away if a certain type of advertising campaign is working as anticipated so they can act immediately to correct the situation if the campaign is failing.
Improving Your ROAS
This can make a larger profit margin for the ROAS. The ROAS can also be used to track conversion rates – the higher the conversion rate, the higher the ROAS.
There are quite a few free and paid services online that can assist businesses in tracking their ROAS. These services are critical because they allow companies to set numbers and goals.
Companies can also determine whether a particular ad campaign is working by using Google Adwords or similar services.
The Bottom Line
Reliance on ROAS metrics alone can be misleading. The value of ROAS to a company depends on the goals of the advertising campaigns, the conversion factors and what is being spent. Some campaigns might have a high ROAS but the company could still end up losing money because what they're selling might cost them more to produce and ship than is profitable. This can be particularly true when these costs are combined with the overall cost of the advertising.
But this doesn't necessarily mean marketing wasn't successful. The ROAS is only calculated with the cost of the advertising in mind, so other factors that actually eat into profits might not be considered.
ROAS can be extremely helpful for businesses when it is used correctly. It can help to determine whether the advertising campaigns they're using are turning them a profit, sooner rather than when it's too late and a lot of money has already been lost.