If you are a business owner or marketer, chances are you have heard of the term ROAS (Return On Ad Spend). But what exactly does it mean and why is it important? As we move through the digital age, advertising efforts in some form or other are now necessary for success in every business.
With the advent and ascendancy of myriad online marketing channels, measuring just how effective your advertising really is has become even more necessary right now. This is where ROAS comes in, offering a very important indicator certain to help everyone keep track of the return on investment in for example their advertising campaigns.
What Is ROAS (Return On Ad Spend)?
Return On Advertising Spend (ROAS) is a crucial marketing metric used to measure the effectiveness of digital advertising campaigns. ROAS allows online businesses to evaluate the performance of their advertising efforts by measuring the ad revenue generated versus the cost of an ad campaign.
This metric is crucial in helping businesses determine which ads are successful and those that require improvement to boost overall performance. Consequently, marketers, advertisers and business professionals will have greater visibility into how their ad investments are performing and what decisions to make that can be more strategic in their digital marketing practices.
How To Calculate Return On Ad Spend?
Return on Ad Spend calculation is simple, once you know the basic formula:
ROAS = revenue from ads / ad costs (ad spend)
Let us give an example!
Suppose, you spent $1000 on a specific advertisement, and it brought $4000 of revenue. In this case, ROAS is a $4.
This means that you received $4 for $1 spent, therefore we write i.e. equal to 4:1 ($4 revenue for every $1 spent).
To convert this to a percentage form, it is only necessary to multiply by 100, it turns out 400%.
The complexity while performing ROAS calculations is to determine all ‘cost of ads’. In this study, it will be necessary to determine whether only direct expenditures on the advertising platform should be taken into consideration or additional costs such as vendor commissions and remuneration of personnel who worked on the campaigns should also be included.
Moreover, the definition for ‘cost of ads’ can also depend on the type of the campaign. Thus, it may be a good idea to calculate ROAS with direct ad spend and do a similarly comprehensive calculation with all related expenses.
This alternative method of calculation will analyze the immediate impact of your advertising investments on campaigns and its broader consequences.
Why Return On Ad Spend (ROAS) Really Matters?
Thus, the acquired knowledge about the value of ROAS goes significantly beyond measuring ad efficiency, forming pivotal economic relations within an ecommerce store. When paired together as an analysis tool for the same metrics, ROAS and CLV (Customer Lifetime Value) offer comprehensive insights into ad making processes, targeting strategies, and ad results after distribution and are implemented for budget decisions in both shorter and longer terms.
More specifically, strict surveillance over ROAS implementation enables ecommerce stakeholders to reach rational ad budget optimization, boosting commercial operations outcomes and financial flows.
What ROAS Is Considered Good?
What allows describing ROAS as good or bad depends on your profit margins, operating expenses, and overall financial health. While 4:1 is generally taken as the golden standard, which means that if for everyone spent dollar you earn four, the situation may differ significantly based on the peculiarities of your business.
A start-up with small cash flow should choose a higher ROAS to become profitable in the long run; a developed online store, striving for growth, is more likely to tolerate a lower ROAS. Given that each business has its unique specifics, such as profit margins and budget constraints, it is crucial to set an achievable goal.