Everyone wants to get their money’s worth – both consumers and advertisers. So how do you know whether your latest ad campaign was worth it?
One way to tell is to figure out your ‘return on ad spend’, AKA your ROAS. But how do you calculate return on ad spend? Don’t worry – we’ve got you covered.
Here’s the step-by-step how-to…
Working out your ROAS
ROAS is a ratio of the revenue your ads generate to each dollar you spend on their campaign. Here’s the ROAS formula (left).
For example, let’s say your last ad campaign generated $4 for every $1 you spent.
In this case, your ROAS is 4:1. And your ROAS calculation is 4/1=4.
You can also express ROAS as a dollar value by taking the first part of the ratio that represents the profit. In the example above, the dollar ROAS value is $4.
Yet others prefer to express ROAS as a percentage value. To do this, multiply the figure from the ROAS calculation by 100. In the example above, the percentage ROAS value is 400%.
ROAS vs ROI
Return on investment (ROI) is a similar, yet different, metric to ROAS. Both are used to evaluate marketing performance, but they focus on different elements.
ROAS focuses on the:
- direct ad costs of a campaign
- revenue generated.
ROI focuses on:
- all costs involved, including indirect costs, eg. the salary equivalent of the time it took for staff members to create and produce the ad
- the campaign’s overall profitability.
Typically, marketers use ROAS with other metrics, such as the number of impressions or link clicks generated, to evaluate how effective an ad campaign is. And ROAS is particularly handy if you’re trying to optimise a digital ad campaign.
For example, imagine you were running two Facebook ads simultaneously. Both had identical copy and art direction, but you’d targeted each one to different audiences (eg. one to a cold audience and one to a ‘lookalike’ audience).
In this case, tracking ROAS could help you to identify which ad is performing better. And once you know this, you can then modify your campaign spend to select the better-performing ad.
On the other hand, you can use ROI to determine the overall profitability of your marketing investment. Maybe you could use it at the ad campaign level, or even look at the bigger picture of your organisation’s entire marketing efforts.
What is a good target ROAS?
A ‘good’ target ROAS varies depending on your industry and the medium in which you’re advertising. That said, here are some stats to help guide your benchmarking:
- According to Hubspot, ROAS values are usually between $4-$11.
- Meanwhile, a 2016 study by Nielsen Catalina Solutions suggests that the average ROAS across consumer packaged goods (CPG) brands held steady at around $2.50 between 2004-2015.
Ultimately, a good ROAS for your business is one that helps you achieve your target profit margins while factoring in your specific budget inputs.
The limits of ROAS
For brand awareness campaigns, take your ROAS with a grain of salt. These campaigns are designed to move people further down the purchasing funnel and help boost future conversions. Essentially, people need to know who you are before they consider buying from you.
That’s why survey and website analytics data are generally better measures of brand awareness campaign success than ROAS. However, if the primary goal of your campaign is to generate immediate sales, ROAS is critical in determining success.
But remember: a good ROAS does not mean you’re making money. It only tells you whether your ad campaign did its job, not whether you’re making an overall profit.
As we talked about earlier, that’s firmly a job for ROI.
That ROAS formula again
After you’ve read the above, ROAS should be a whole lot clearer for you.
But, because we love being super helpful, here’s that formula again for you to keep handy the next time you need to remember how to calculate ROAS.