How to Calculate ROAS: A Step-by-Step Guide
How to Calculate ROAS: A Step-by-Step Guide
ROAS, or Return On Ad Spend, is a vital metric for advertisers and marketers using paid channels to drive new user acquisition.
Calculating ROAS tells you how much money you’re making for every £1 you spend on paid ads — whether that’s on Facebook, Google, Snapchat, or any other ad platform.
Tracking and understanding ROAS will help you make more informed decisions regarding your channel mix, ad creatives, audience targeting, and how your paid marketing strategy is influencing your company’s top line.
In this concise guide, we’ll show you exactly what ROAS is, how to calculate return on ad spend, how to interpret it, and more. Let’s jump in.
What exactly is ROAS?
Return On Ad Spend (ROAS) is a measure of how much revenue is generated for what you spend on your advertising activities — and usually this only takes media spend into account.
It’s a key metric to look at when analysing how well your campaigns are performing. If your ad campaigns are resonating with your ideal customer, you’ll likely see a high ROAS.
If not, you’ll struggle to break even and generate any meaningful return on your ad spend.
It’s similar to ROI, but there are some differences, because ROI includes other costs that are not associated with advertising. We’ll look more at those differences later on in this piece.
How to calculate your ROAS
ROAS is pretty simple to calculate.
Total Conversion Value / Advertising Costs = Return on Ad Spend
Here’s an example of what this would look like in practice:
Your most recent Facebook Ad campaign cost your business $1,500 in ad budget. But it resulted in $9,000 worth of purchases through your landing page.
So, divide $9,000 by $1,500, and you have your ROAS. In this case, your campaign has a Return on Ad Spend of 6:1. And you could also express that as 600% ROAS, or 6x ROAS.
You can compare ROAS across different campaigns — for example:
- Which campaigns have the highest overall ROAS?
- Are specific ad formats, such as Google Shopping campaigns outperforming your branded search or retargeting Display ads?
- Does Facebook Ads show a better ROAS than Twitter Ads? Does one audience provide a better ROAS than another?
ROAS is an excellent indicator of ad performance for your various cross-channel campaigns focused on conversions. You can use it to compare channels, or campaigns within channels.
When you’ve calculated your ROAS, you can look at it in combination with your cost of goods sold and other related expenses to find your campaigns' total ROI.
How to calculate break-even ROAS
While ROAS measures the profitability of a campaign, break-even ROAS tells you the minimum revenue an ad campaign has to generate to cover your costs.
Advertising Costs / Profit Margin = Break-even ROAS
So for example, if your advertising costs are $1,000 and your profit margin is 50%, the break-even ROAS would be:
$1,000 / 50% = 2:1
This means you need to generate $2 in revenue for every dollar spent on advertising to break even.
ROAS vs ROI
If you already measure your ROI, you're probably wondering if it's worth measuring ROAS at the same time. In general, we’d advise that it’s always best to keep a close eye on your ROAS, even if your overall ROI is positive. ROAS can be seen as a key component of ROI.
ROI is your total return-on-investment, and naturally this is a vital business metric to track. It's useful because it considers your business's total costs (ad spend, salaries, cost-of-goods-sold, overheads, and all the other costs of doing business) and will give you clarity into your company’s performance.
But, because it takes so many factors into account, it doesn't give you the granular detail you need to judge your advertising performance.
Quite simply, ROAS lets you determine if your ads generate the engagement and conversions you need to justify running them. It'll also help you compare your revenue generated across different ad platforms so you can optimise your strategic ad spend accordingly.
It’s best to measure the two metrics side-by-side, and to contextualise them together.
What ROAS should you be achieving?
Your target ROAS will depend on a variety of factors, including:
- Advertising platforms
For brands with high profit margins and high-value goods or services, a Return on Ad Spend of 2-4 might be enough to scale your ad campaigns profitably. But, if you have lower margins and high operating costs, you’ll probably need a higher ROAS to justify your investments.
While most companies keep their ROAS to themselves, data from B2C brands using Amazon Advertising shows that 40% of advertisers see a 7:1 to 10:1 ROAS.
The key is to test various campaigns and find the platforms, creatives, and messaging that resonate with your audience enough to generate a ROAS sufficient to justify and scale your ads.
Setting your Target ROAS on different ad platforms
Most mature advertising platforms offer a setting which allows you to optimise campaigns based on your desired Return on Ad Spend. For example, Google Ads has a Target ROAS bidding strategy that optimizes your ad bids based on the ROAS you need.
As well as Google Ads, you can easily measure your ROAS on Facebook and Snapchat as this bidding strategy is built into the platforms.
On LinkedIn, you can use Target Cost Bidding, which is designed to get you results for a specified cost per result. It’s not perfect, but once you have a benchmark for how much it costs to generate a conversion, you can optimise your target cost around that.
And on Amazon Advertising, you can view your ROAS in your campaign manager.
What are the limitations of ROAS?
Measuring Return on Ad Spend will give you some clear and useful insights, but be careful not to base every key decision you make off ROAS alone.
There are certainly limitations to ROAS.
For example, let’s say you’ve been investing heavily in brand marketing and content marketing for the past year. Then, you run an ad campaign to a warm audience that generates a 10:1 ROAS.
When looking at your numbers, it’ll look like your paid ads vastly outperform your brand and content marketing efforts.
But, chances are, you wouldn’t have achieved a Return on Ad Spend of 10 without building a well-known brand and nurturing a warm audience who already know your company and the benefits your product/services offer.
ROAS also only really applies effectively to campaigns designed to generate direct conversions.
If you arerunning top-of-funnel campaigns to build awareness, they’re not going to generate high ROAS themselves. But, those awareness campaigns will help your bottom-of-the-funnel ads generate a higher ROAS as your audience are familiar with your brand.
If you only judged success by ROAS, you’d miss vital context. Always use it in conjunction with other metrics you care about and insights from your marketing team.
Combine ROAS with other key business metrics
Clearly, ROAS is a metric you should measure whenever you run digital ad campaigns.
It will help you understand how effectively your ads are performing, which campaigns are generating the best results, and what type of messaging and creatives resonate with your audience.
However, it’s not a perfect metric. ROAS should always be used in line with other information you have in your business. Look at it in combination with your other marketing campaigns, as well as overall ROI.
If you need help creating campaigns that hit your target ROAS and generate new business, Traktion’s vetted marketplace of growth marketing experts can help. Get access to an on-demand pro ready to identify opportunities and grow your business through paid channels.