According to research by eMarketer, worldwide digital ad spending will keep increasing and reach over $700 billion in 2025. With organizations spending so much money on ads, and competition so high, you want to make sure you're getting the most out of your money.
When it comes to ecommerce, return on ad spend (ROAS) is a key metric to track. ROAS tells you how much revenue your business generates for every dollar spent on advertising costs. In other words, it measures how effective your advertising efforts are in driving sales.
The benefits of tracking ROAS are clear. By understanding which ads are driving the most sales, you can focus your energy on the most effective campaign strategies and improve your return on investment (ROI). In this article, we will define ROAS, explain why it matters for ecommerce businesses, and discuss different types of ROAS that can be tracked.
What is return on ad spend (ROAS)?
ROAS is a performance metric that ecommerce businesses use to measure the return on their advertising investments. ROAS provides valuable insights into how effective an ad campaign is at converting customers and helps you identify where you can optimize your ad budget to maximize return. To calculate ROAS, you divide the total revenue generated from ads by the total advertising spend.
So, if you're looking to maximize return on your advertising investments, ROAS is a key performance metric to consider using in your ecommerce business. Whether you're just getting started with marketing or are looking for ways to improve return on investment across your campaigns, ROAS can help you identify the most effective strategies and tactics for driving sales.
Why is ROAS important for ecommerce businesses?
For ecommerce businesses, ROAS is crucial for understanding how your marketing efforts are driving sales and return on investment. By tracking ROAS, you can pinpoint which campaigns and channels are most effective at driving revenue and make data-driven decisions about where to focus your advertising budget moving forward.
Make data-backed decisions
One of the main benefits of using ROAS is that it provides you with real-time insights into how your marketing strategy is performing. Rather than basing decisions on instinct or previous learnings, you're able to objectively see what's working and what isn't. With ROAS, you can make data-backed decisions about where to allocate your marketing budget for paid ads to drive the largest profit margins.
Evaluate different marketing channels
Another key benefit of using ROAS is that it allows you to identify the most successful advertising channels. For example, if you have a higher return on ad spend from Instagram compared to text ads on search, then it may be worth doubling down on that channel by allocating more of your budget. This can help you get the best results out of your marketing budget, as well as ensure that you're running the right kind of advertising campaign for your target audience.
Refine and optimize your ad campaigns to improve ROI
ROAS also helps you identify areas where you can improve your return on investment and drive better performance across your marketing campaigns. For example, if a specific ad campaign is generating a low return on ad spend, you can use this insight to refine and optimize your campaign so that it's more effective. Test out different ad images and copy to see which bring the highest ROAS, then roll them out across your campaigns.
ROAS vs. other metrics
It's important to use ROAS in conjunction with other metrics to gain a more complete understanding of how your ecommerce business is performing. By combining ROAS with a variety of other metrics, you can get a comprehensive view of your ecommerce business's performance and identify areas where you can improve.
Here are metrics that you can track in addition to ROAS, along with their key differences.
ROAS vs. ROI
Both return on investment (ROI) and ROAS measure the return on investments in marketing, but there are a few key differences between them. The main difference is that ROI takes into account all forms of revenue and marketing spend, not just paid ads. ROI is calculated by dividing net profit by the amount invested in marketing. ROI measures how profitable your marketing is overall, whereas ROAS typically has a narrower focus, like the result of a specific campaign's ad.
ROAS vs. Cost Per Acquisition (CPA)
CPA measures how much you spend to acquire a single customer. It's calculated by dividing the total cost of a campaign by the number of conversions. ROAS is similar to CPA in that both metrics can be used to evaluate return on ad spend and understand how successful your marketing campaigns are at driving conversions. However, ROAS takes into account the revenue from sales, whereas CPA only accounts for the number of conversions without considering how much revenue those customers bring in.
ROAS vs. Conversion Rate
Conversion rate is a marketing metric that measures the number of website visitors who take the desired action, such as making a purchase or signing up for a mailing list. In contrast, ROAS measures return on ad spend in terms of revenue generated from online ads only. Thus, ROAS and conversion rate complement each other by providing insights into different aspects of return on investment.
While ROAS can help you measure the return from ad spend and identify marketing channels with the highest return, the conversion rate can help you understand how to improve return by optimizing the effectiveness of your site's landing pages or product descriptions. In general, ROAS is a more holistic metric for evaluating return on advertising investments, while conversion rate is better for measuring return on individual marketing campaigns or channels.
Variations of ROAS
There are a few different variations of ROAS that can give you a more nuanced understanding of how your ads are performing.
Marketing efficiency ratio (MER - also known as ecosystem ROAS or eROAS)
While ROAS measures revenue directly attributed to campaigns, MER measures revenue that comes in across the entire business in relation to ad spend. It's calculated by dividing total revenue across the business by ad spend.
New customer ROAS (ncROAS)
New customer ROAS (ncROAS) is a variation of ROAS that helps you measure the return on your investment in acquiring new customers. It's calculated by dividing the total revenue generated from new customers by ad spend over a specific period. NcROAS allows you to see how effective your ads are at bringing new people to your ecommerce store.
Profit on ad spend (POAS)
Profit on ad spend (POAS) is a metric that measures the amount of profit generated from ads compared to the amount spent on ads. The difference between ROAS and POAS is that ROAS uses revenue generated, whereas POAS uses gross profit generated. POAS gives you an insight into how much profit the products you're advertising are actually generating. Based on POAS you might choose to adjust the products that you include in your ads.
Learn how to calculate and track the ROAS of your ad campaign
Although calculating ROAS with the basic ROAS formula (revenue generated by ads / ad spend) seems pretty straightforward, the reality is a little more complicated.
First of all, you have to decide how you want to attribute revenue to different ads in your campaign. A customer might see a video ad on YouTube, an Instagram post, and then a text ad on the search page. They click on the text ad and then make a purchase. In this case, which ad is responsible for the conversion? Which ad should be attributed with the revenue from the sale?
Tricky, huh? But do not fear. We've created a guide that breaks down how to calculate and track your ROAS in simple terms. Read our guide on how to calculate and track ROAS.