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How to Calculate Return on Ad Spend (ROAS)

 

Return on ad spend (ROAS) is one of the most important metrics for measuring the effectiveness of your advertising campaigns. Calculating your ROAS allows you to understand how much revenue you are generating for every dollar you spend on ads. 

In this comprehensive guide, we'll walk you through everything you need to know about calculating your ROAS.

 

What is Return on Ad Spend (ROAS)?

Return on ad spend (ROAS) is a performance marketing metric that measures the revenue generated per amount spent on advertising. It is calculated by dividing the total revenue from a campaign by the total ad spend.

For example, if a campaign generates $10,000 in revenue and costs $2,000 to run, the ROAS would be 5 ($10,000 revenue / $2,000 ad spend). This means for every $1 spent on ads, $5 was generated in revenue.

 

Why ROAS is Important for Advertisers

ROAS provides a clear understanding of the return you are getting from your ad investments. It allows you to quickly determine the profitability of your campaigns and make optimization decisions based on performance data.

Here are some of the key reasons ROAS is important:

• Measure campaign profitability - High ROAS campaigns are profitable. Low ROAS campaigns may be losing money. ROAS allows you to identify your best-performing campaigns.
• Compare the performance of campaigns - ROAS provides an "apples to apples" comparison between campaigns, allowing you to double down on what's working.
• Make data-driven optimization decisions - By understanding your ROAS, you can optimize campaigns to improve them over time.
• Determine future budgets - ROAS helps inform your ad spending strategy and budget planning process.
• Calculate the long-term value of campaigns - ROAS demonstrates the revenue campaigns drive over extended periods.

How to Calculate ROAS

Figuring out your ROAS is simple to do manually or using free online tools. Here is the formula:

• ROAS = Total Revenue / Total Ad Spend

To calculate ROAS, you need just two metrics:

• Total Revenue - The total sales revenue generated from the ad campaign.
• Total Ad Spend - The total amount spent on advertising during the campaign period. Include all ad costs like production and agency fees.

Let's look at an example:

Campaign Results

• Total Revenue: $50,000
• Total Ad Spend: $10,000

ROAS Calculation

• Total Revenue ($50,000) / Total Ad Spend ($10,000)
• ROAS = $50,000 / $10,000 = 5

For every $1 spent, this campaign generated $5 in revenue, which is a solid ROAS.

 

Tips for Accurate ROAS Calculation

Here are some tips to ensure you calculate ROAS accurately:

• Use gross revenue - Don't subtract taxes or production costs from revenue. Use gross sales/revenue generated.
• Include all ad costs - Account for all advertising expenses like fees and production costs.
• Align periods - Use the same date range for revenue and ad spend.
• Avoid multi-touch attribution issues - If running multiple campaigns, avoid double-counting revenue.
• Focus on direct response - ROAS works best for direct-response campaigns with trackable conversions. Avoid brand awareness campaigns.
• Use attribution modelling - For sophisticated measurement, use attribution to assign value to ads.

 

ROAS Calculator Tools

Manually calculating ROAS for multiple campaigns can be tedious. Thankfully, there are free online ROAS calculator tools that make it easy.

Here are some of the best ROAS calculators:

• Wordstream ROAS Calculator - Easy automated tool for computing ROAS.
• Seller's Choice ROAS Calculator - Calculates ROAS and other metrics like CPA and CPC.
• ROAS Formula in Excel - Simple ROAS formula set up in Excel.
• Smart Insights ROI Calculator - Calculates additional metrics like ROI and gross profit.
• Cyfe Marketing Measurement ROAS Calculator - Integrates with Google Analytics for automation.

These tools do the math for you automatically once you input your revenue and ad spend figures. They provide an easy way to monitor ROAS across multiple campaigns and platforms.

 

ROAS Benchmarks by Industry

Your target ROAS will vary based on factors like your profit margins, average order value (AOV), and industry. Here are some average top-performing ROAS benchmarks by industry:

• SaaS and software - ROAS of 10-15x
• E-commerce - ROAS of 5-8x
• Lead gen - ROAS of 4-7x
• Mobile apps - ROAS above 5x
• Education - ROAS of 6-10x
• B2B services - ROAS of 8-12x
• Financial services - ROAS of 12-15x

Keep in mind these benchmarks serve as general guidelines. The best way to set ROAS goals is to test different campaigns in your niche and optimize based on the results.

 

How to Improve Your ROAS

Once you’ve calculated your ROAS, here are some tips to improve it over time:

Target high-intent audiences - Focus ad spend on qualified audiences more likely to convert to drive up ROAS.

Find your best-converting keywords - Continuously test new keywords and double down on those delivering the highest ROAS.

Optimize landing pages - Create dedicated landing pages and optimize them for conversions.

Enhance ad copy - Test different ad copy and creatives to increase click-through rate (CTR) and conversion rate (CVR).

Monitor ROAS regularly - Check ROAS frequently to identify changes and make optimizations.

Do A/B split testing - Test different variables like copy and creatives to boost conversions.

Analyze customer data - Understand your highest-value customer demographics and target more of them.

Invest in top-performing campaigns - Scale the budget on campaigns producing the highest ROAS.

Get rid of low ROAS campaigns - Cut budgets from campaigns not producing acceptable ROAS.

Attribution modelling - Leverage multi-touch attribution to properly value each interaction.

With continuous optimization and ROAS monitoring, you can refine campaigns to steadily increase returns.

 

ROAS FAQs:

Q1: What is a good ROAS?

A: There is no single benchmark for a good ROAS as it varies significantly between industries. A good rule of thumb is a ROAS above 3x is solid and above 5x is excellent. Focus on testing to see the ROAS your business can sustain profitably.

Q2: Should I use ROAS or ROI?

A: ROAS is better for evaluating the performance of advertising as it directly compares revenue to ad spend. ROI includes more factors beyond just advertising which muddies the analysis of marketing effectiveness.

Q3: Is ROAS calculated daily, monthly, or lifetime?

A: ROAS should be calculated based on the full period you are evaluating, whether that is daily, monthly, quarterly or annually. Lifetime ROAS can also be calculated by looking at revenue vs spending over a product or account lifetime.

Q4: Can ROAS be more than 100%?

A: Yes, ROAS expresses a ratio of revenue to spend, so it can commonly be above 100%, for example, 200% or 500%. This is a good thing, showing you are generating significantly more revenue than what is being spent on ads.

Q5: Why is my Facebook ROAS so high?

A: A very high ROAS on a platform like Facebook may indicate multi-touch attribution issues where you are counting conversions driven by other channels. Ensure you use the platform’s conversion tracking to get accurate platform-specific ROAS.

Q6: How do you measure ROAS across channels?

A: Use marketing attribution software or rules-based attribution to properly assign credit to each channel assisting conversions. Then you can accurately calculate ROAS independently for each channel.

 

Conclusion

Calculating and optimizing return on ad spend is critical for maximizing the profitability of your marketing campaigns. By accurately measuring your ROAS using the guidelines provided, you can identify winning campaigns to double down on and losing ones to cut. 

Set ROAS goals based on your business model and industry benchmarks. Continuously monitor your metrics and test new strategies to steadily improve ROAS over time. With a data-driven approach to ROAS, you can get the highest return from your ad investments.