ROAS, or return on ad spend, is a marketing metric that businesses use to measure the effectiveness of their advertising campaigns. ROAS calculation can be tricky, but with the right tools and understanding, it's possible to get a clear picture of how much revenue your ads are generating. Armed with that data, you’ll be able to optimize your marketing budget.
Once you've started to calculate and track ROAS, you'll be able to adjust the way you run paid ads to optimize your revenue return. In this article, we'll walk you through the necessary steps for calculating ROAS, as well as provide advice on how to attribute revenue to ads, and show you how to track ROAS over time. Let's get started!
Step 1: Calculate revenue generated from ads by attributing sales
To calculate ROAS, first calculate the total revenue generated from your ads. This involves tracking sales or leads that can be attributed to advertising activities. You can use the revenue from a single ad as well as the collective revenue from a set of ads in an advertising campaign or in a specific channel.
For instance, you might calculate the revenue of all the ads in a campaign individually to compare different ad copy or images. Equally, you might want to see the ROAS of an entire ad campaign and compare it with the ROAS of a campaign you ran last quarter. Alternatively, you could use the total revenue from all the ads in one channel, and then compare channels to figure out which channel is the most effective.
Attribution of sales
A customer might interact with several different ads before converting. So, which ad should you give credit for the revenue generated? When it comes to attributing sales to your paid ads, there are several different attribution models you can use.
The most popular models are first-touch, last-touch, or the most complex model: multi-touch attribution. Each model has its own strengths and weaknesses, that means it's important to select the model that best suits your business needs.
First-touch attribution gives sales credit to the first touchpoint a customer has with your brand, while last-touch attribution gives all the credit to the final touchpoint. There are also many different types of multi-touch models that attribute different levels of credit to various touchpoints, depending on a set of rules or a formula.
For example, linear attribution (which is a type of multi-touch model) assigns equal weight to each touchpoint a customer has with your brand. This can be helpful for businesses that want a more balanced view of their marketing efforts.
No single attribution model is perfect, so it's important to test out different models and see which one provides the most accurate insights for your business model.
Step 2: Calculate total advertising spend
In order to calculate ROAS, you need to include all the costs associated with your advertising activities. This typically includes the costs of the ads themselves – which will be determined by the cost-per-click and the number of people who click on your ad. But the ad spend can also include other costs, such as the cost of producing ads. By including all of these advertising costs, you can get a more accurate picture of your ROAS and whether your advertising efforts are proving to be effective.
The costs you include should match what you used for your revenue calculations in step one. If you used the revenue from a single ad, calculate the cost of that single ad. If you used the revenue from a marketing channel, calculate the costs of all ads you ran in that channel.
Step 3: Calculate ROAS by dividing revenue by ad spend
ROAS is expressed as a percentage, typically ranging from 0-1,000%. For example, if ROAS is 100%, it means that ad revenue equals your total ad spend.
Once you have calculated your total ad spend and revenue generated from ads, you can calculate ROAS by dividing the revenue by the cost and then multiplying that value by 100.
ROAS = (revenue from ad / ad spend) x 100
For example, if you generated $1,000 in revenue from your ads, and your total ad spend was $500, your ROAS would be 200%. This indicates that for every dollar spent on ads, you generated $2 in revenue.
Step 4: Track ROAS over time
Tracking ROAS data over time can give you valuable insights into how your advertising efforts are performing. It can help you identify which ads or channels are generating the most revenue and whether your ROAS is increasing or decreasing.
To track ROAS over time, you'll need to calculate it periodically (e.g., monthly, quarterly, or yearly) and track the resulting values. This will allow you to see how your ROAS changes over time and identify any trends.
There are a number of different data management tools you can use to track ROAS, including spreadsheets, marketing automation platforms, and CRM software.
Spreadsheets are versatile tools that can be used to track a variety of data, including ROAS. They're easy to use and you can customize them to fit your needs, making them a popular choice for businesses. Once you've calculated your ROAS for a certain period of time, you need to input it into the spreadsheet and then create a graph to visualize trends over time.
Marketing platforms and CRM software are also good options for tracking ROAS. Using a platform will still give you a similar outcome to a spreadsheet, but you'll be able to track data much faster and with much less effort. Some platforms that allow you to track ROAS are Google Analytics, HubSpot, and Salesforce.
Step 5: Analyze the results
The value of ROAS as a metric is when you use it to inform your advertising initiatives moving forward. Once you've calculated ROAS for a given time period, you'll need to analyze the results to see what they mean for your business.
Analyzing ROAS involves looking at the total ROAS for all your ads and channels, as well as for specific ads types or channels. You'll want to look at whether ROAS is trending upwards or downwards and try to determine why this might be the case. This information can help inform your decision-making around which ads to prioritize, ad spend, how much to spend on your next campaign and more.
Some key questions to ask when analyzing ROAS include:
What ROAS am I seeing overall, across all my ads and channels?
What ROAS are my top-performing ads achieving, and how does this compare to my overall ROAS?
What ROAS are specific channels or ad types generating?
Are ROAS levels consistently growing or decreasing over time? If so, why do you think this is happening?
Use the results of your analysis to inform your ad strategy. For example, if ROAS for a particular ad or channel is consistently low, you may want to reallocate your budget or eliminate this ad from your campaign. Alternatively, if ROAS for a particular ad or channel is consistently high, you may want to increase your ad spend in this area.
If you notice that your ROAS is decreasing, it's an indication that you need to adjust your advertising strategy. Alternatively, if your ROAS is increasing, you might want to consider expanding your advertising efforts in order to capitalize on the success. Tracking ROAS over time can help you make these decisions with confidence.
What is a good ROAS?
How long is a piece of string? Although people often quote 4:1 (or 400%) as a good target ROAS, the truth is it really depends on your specific business and your industry. It also depends on the health of your business and the size of your profit margins. If you have large profit margins, you’ll be able to survive a lower ROAS. However, if you have smaller margins, you’ll need a high ROAS in order to stay profitable. Consider your operating expenses and profit margins before deciding what is an acceptable minimum ROAS for your business.
When evaluating ROAS, rather than attempting to compare yourself to other organizations, focus on what ROAS means for your different ad approaches. Compare the ROAS of specific ad types or channels to the overall ROAS of a campaign. Where you see a higher-than-average ROAS, you know those ads are working well and should investigate further to replicate their success. Where the opposite is true, you know you need to intervene to improve those ads.
Improve ROAS, increase revenue
In calculating your ROAS, you might have discovered that your ads are bringing less-than-desirable results. Even if you're satisfied with your current ROAS, there's always room for improvement. After all, who doesn't want their ad campaigns to be as effective as possible?
A higher ROAS means that you can bring in even more revenue while keeping your ad spend the same — improving your profit margin. Check out 8 Ways Ecommerce Brands Can Increase ROAS