How To Calculate ROAS
Return on advertising spending = revenue / advertising costs
Businesses use a range of metrics to evaluate their advertising strategies, including ROAS calculations. This figure helps marketing professionals determine if they spend their money effectively. Learning more about ROAS can help you understand the best ways to allocate funds for advertising. In this article, we define ROAS, share why it matters to businesses, explain how to calculate ROAS and provide examples of this calculation in advertising.
What is ROAS?
Return on advertising spending (ROAS) measures the success of digital advertising and traditional ad campaigns. Marketing and advertising professionals use ROAS to find out what measures were effective and which methods need improvement. This figure also shows how much revenue a business earns for each dollar they spend on advertising. Marketing professionals calculate ROAS as a dollar amount and may later change it to a ratio. Using this figure, they can track the performance of various marketing strategies.
Why is ROAS important to businesses?
Return on ad spend allows you to measure the success of an advertising campaign. By determining the direct revenue generated from advertising, this figure informs many other decisions regarding how businesses use ads. ROAS provides data for important marketing choices, such as which campaigns to continue and which to decrease. It also helps you set advertising budgets.
ROAS gives an overall picture of the health of your business because of how it relates to profit margins. It shows the effectiveness of specific campaign functions, including the quality of leads from affiliate partners. ROAS calculations allow you to assess your overall marketing strategy in terms of advertising dollars spent to gain sales and profits.
How to calculate ROAS
Here are the steps to help you calculate ROAS:
1. Calculate the revenue from an ad campaign
To find ROAS, you first need to determine the revenue generated by a specific ad campaign. You can also use the revenue from the entire scope of your advertising efforts to find your total ROAS. Ad revenue comes from the amount of sales profit directly related to advertising activity.
2. Divide revenue by advertising costs
The next step to calculate return on ad spend is to divide your ad revenue by the cost of advertising. Ad costs can come from a variety of items, including leads, cost per click and traditional advertising like print marketing. Track the cost of your advertising using digital reports or partner with your accounting team to ensure you have correct data for your calculations.
3. Determine your dollar amount
Once you divide the revenue by the cost, you can find out your return on advertising. Marketing professionals use this figure to learn if their advertising efforts are worthwhile. The dollar amount of ROAS shows businesses how effectively they allocate funds for ad campaigns or if they need to reevaluate their spending.
4. Change the dollar amount to a ratio for further analysis
Some marketing professionals take the final amount and turn it into a ratio to better understand how much money they make for every dollar spent. A business may consider a 3:1 ratio cost-effective because they’ve tripled their investment. Other companies, however, may need a higher ROAS to make a profit after spending money on advertising.
Examples of ROAS calculations
Below are two examples of ROAS calculations that business might use:
Example 1
Alberto asked his marketing team to determine which banner ad campaigns brought in the most business for Gamezone in the first quarter of the year. After looking at the cost of each campaign and the revenue generated by the direct traffic from banner advertisements, Alberto wanted to know his return on all the funds spent for each strategy. He calculated the ROAS for Gamezone by dividing their total revenue for the quarter, which amounted to $35,000, by the cost of the banner ad campaign, which cost $10,000.
Alberto determined that his return on ad spend was $3.5 for every dollar spent, a figure which proved the campaign valuable enough to continue for another quarter. Here is what his calculation looked like:
$35,000 / $10,000 = $3.5
Example 2
Monique studied three separate ad campaigns to find out which two produced the best results for her shoe company. She wanted to compare the ROAS of each to determine the most profitable and effective strategies and questioned whether her paid keyword search was providing enough return on ad spend. Compared to paid video ads on social media and banner ads on review websites, the keyword campaign had underperformed for the previous month.
To find out which campaigns produced the most viable return, she determined the ROAS for each. Monique found that after assessing her revenue from each strategy, she needed to adjust her plans for certain campaigns. Social media ads brought in $25,000 in revenue after a cost of $15,000. Banner ads generated a revenue of $14,000 after costing $6,050. Finally, keywords earned a revenue of $10,000 from a cost of $2,000. Monique was surprised to find that her keywords performed better than the other campaigns that month based on the words she bid. Here is what she found in her calculations:
Social media video ads: $25,000 / 15,000 = $1.7
Banner ads: $14,000 / $6,050 = $2.3
Keywords: $10,000 / $2,000 = $5
6 tips for calculating and analyzing ROAS
Here are some ways you can enhance the way you determine and utilize your return on ad spend data:
1. Identify costs for digital marketing
Analyzing these items after you calculate ROAS can help you decide if your spending is worth the amount you paid:
- Vendors or Affiliates: Certain vendors may generate different ROAS figures depending on how they manage an ad campaign.
- Impressions: The number of people viewing your ads can impact the value of your ROAS.
- Clicks: Consider how many consumers engage with your advertising when analyzing your ROAS.
2. Consider profit margins
ROAS is an important factor in determining the dollar amount your business needs to make a profit. Since this figure is different for every business, it’s important to decide how far you can stretch your advertising budget and still earn enough from your campaigns. While a 3:1 ratio may work for some, larger businesses may need to see a higher dollar amount to make their ad spending viable.
3. Use your ROAS to pay for other costs
Businesses often work toward earning an amount that covers ad spending and reimburses fixed costs like rent and digital expenses. The more additional funds you can bring in using your ROAS, the more you can add to your company’s profit. When your ad spend brings in more leads that convert to paying customers, the money you pay for advertising becomes more valuable.
4. Determine profit margins first
You may find it easier to set your ROAS goals after you recognize how high a figure you need to make a profit or at least pay for your ad spend. Calculating your profit margin before completing any ROAS figures gives you a clearer understanding of how advertising impacts your overall budget. While profit margins vary from business to business, it’s important to consider this figure so you can recognize what makes an advertising strategy profitable.
5. Customize a digital dashboard to include ROAS
Online tools allow businesses to evaluate digital advertising data by creating a personalized dashboard. While these software systems typically include a wide range of data points for ad spending and traffic, they may not include a specific column or tab for ROAS. Adding a section to monitor and assess return on ad spend through your digital dashboard can help you better track this calculation. You can also look for trends by reviewing dashboard ROAS information from previous months, quarters or years.
6. Make your ROAS calculations specific
You can customize your ROAS calculations to include items like the following:
- Keywords: Find out if your costs for paid keywords in search engines bring in adequate return on ad spending. Whether you group keywords by categories or plan to target specific words, your ROAS can help you determine if organic traffic would be more cost-effective for bringing in leads from search engines.
- Ad campaigns: Calculate the ROAS to include specific ad groups, then compare your return between certain campaigns. This allows you to assess the effectiveness of a single campaign when compared to others based on performance.
