In the quest to drive engagement or boost sales, it can be easy to throw a lot of money at an ad campaign. But how do you know if those dollars are being well spent?
One key metric for measuring the effectiveness of your marketing efforts is ROAS (Return on Advertising Spend). It quantifies the revenue generated compared to each dollar spent on the campaign.
What is the formula to calculate ROAS?
The ROAS formula is a simple one. First, divide your advertising revenue by the total cost of advertising. Then multiply it by 100 to obtain a percentage.
ROAS = (Revenue From Advertising ÷ Cost of Advertising) x 100
For example, if you made $2 in revenue for every dollar you spent on advertising, your ROAS would be 2:1, or 200%.
Let’s take a look at another example. For instance, what if you spent a total budget of $5,000 for the first month of an advertising campaign? Then, at the end of the month, the campaign brought in a revenue of $3,500.
In this case, your ROAS calculation would be:
70 = ($3,500 ÷ $5,000) * 100
So, a ROAS of 70% shows that you only made $0.7 for every $1 spent on advertising. A ROAS this low suggests that you should go back to the drawing board and think of new ways to optimize your campaign.
What are some of the top factors that influence ROAS?
Several factors may influence ROAS either positively or negatively. These include:
The more popular a brand is, the greater ability it has to convert advertising dollars into revenue. For brands in competitive categories, greater brand awareness can play a big role in the success of an ad campaign, enabling them to spend less money while achieving greater reach.
In contrast, an emerging brand with an innovative product will need to spend more time and money educating customers before people are ready to make a purchase.
Type of Advertising
ROAS averages vary depending on the advertising medium. For example, a company may need to spend more money to convert customers through TV commercials than online search ads. It’s often more useful to compare ROAS averages by advertising category than by brand.
Price and Product Lifecycle
A product’s price point is another major factor when it comes to assessing ROAS. If a product that most people only purchase once is priced at $5, then it may not be profitable to run ads on social media. That’s because the acquisition cost per user will be high compared to the expected revenue.
On the other hand, if you’re selling a subscription service that costs $50 per month, a single acquired customer can greatly impact your ROAS.
Something that plays an indirect role in your ROAS is customer reviews. Most people look at online reviews before making a purchase, especially if it’s their first time buying a product. A single negative review can turn away many potential customers, and this lost revenue can be difficult to track.
What is a good ROAS percentage?
It depends. That may sound like a cop-out, but it’s the truth.
In general, a ROAS is acceptable if it covers all advertising costs. This means you broke even. But you should aim much higher because the average ROAS ranges between 400 - 1,100% depending on the advertising medium.
Here are some other benchmarks (that may or may not apply to your company or industry):
- Google Paid Search average ROAS: 1,376%
- Facebook Ads ROAS: 1,069%
- Instagram Ads ROAS: 883%
- Amazon Ads ROAS: 795%
It’s also important to remember that different marketing objectives may result in a different ROAS. For example, if your primary goal is to boost brand awareness rather than generate revenue, your ROAS may be below average.
To get an accurate overall picture, you should consider the business’s overhead costs and total profit margins.
What are some of the best ways to improve ROAS?
Once you’ve learned how to measure ROAS, you’ll probably also want to learn how to improve your numbers.
Improving your ROAS is not always an easy task. However, you can start by addressing some of the factors below:
- Improve mobile-friendliness and overall UI/UX of your website
- Refine your keyword targets
- Run location-specific ads
- Replicate competitor successes
- Optimize landing pages
- Use Product Listing Ads
- Review negative keywords
- Lower production cost per ad
What are the limitations of ROAS?
When judging the success of your marketing efforts, you shouldn’t rely on ROAS alone. That’s because it doesn’t tell the whole picture.
For one thing, ROAS only takes into account the money directly spent on advertising. It doesn’t consider other overhead costs or marketing costs associated with creating the campaign.
ROAS only explains a very small slice of the overall business picture. If the advertised product has smaller margins, the company could still end up in the red when calculating the overall project ROI.
It often takes a while for advertising campaigns to become efficient. Ad network algorithms have become increasingly good at targeting through the life of a campaign, so it’s dangerous to calculate ROAS too early. Instead of assessing ROAS at a single point, chart it over time to see if the trend is positive. You could have a great campaign 2 months from now if you persevere and continue to optimize!
It’s also important to measure ROAS at the right level of granularity. You could have a decent ROAS number for a broad campaign but it could be due to a blend of high-performing devices/geos/terms and very low-performing ones. It’s important to look at ROAS from many different altitudes to continue to optimize your spend.
It can be difficult to ascertain true revenue right away. A campaign with a poor ROAS that only considers spend from the first purchase may be a real winner when you factor in true, longer-term revenue that includes referrals and second-time purchases.
Finally, not all purchases can be successfully attributed to specific campaigns. This is known as the “halo effect” – oftentimes one campaign will be paused, only to see the performance of other campaigns inexplicably drop. Be careful to track the overall ad system’s health as channels are turned off and on.
Should you focus on ROAS?
ROAS is one of many metrics that you can use in your organization’s metrics framework.
But, like we always say: Just because you can measure it, doesn’t mean you should prioritize moving it.
To learn how to determine whether it makes sense to measure ROAS (and other key metrics), check out these guides:
In them, we share the process that the AirOps team uses to help startups, early-stage companies, and other organizations build data analytics and business intelligence programs that drive real business value.