Running ad campaigns without knowing their impact is like shooting in the dark. To truly understand whether your ad spend is delivering results, calculate your ROAS—Return on Ad Spend. This is a powerful metric that shows you exactly how much revenue you earn for every advertising dollar.
Understanding ROAS metrics is key whether you’re optimizing your current campaigns or planning future ones. This guide explores how to calculate ROAS, why it matters, and how it can shape your advertising strategy. Let’s start with a clear definition of ROAS.
What is ROAS?
Return on Ad Spend (ROAS) is a key metric that measures the revenue generated for every dollar spent on advertising. It helps you determine the effectiveness of your ad campaigns. ROAS provides insights into how well your advertising dollars are working by showing the profit generated for each expense. By analyzing ROAS, you can identify which campaigns and strategies yield the best returns, allowing for more effective budget allocation.
Understanding ROAS is essential for optimizing your marketing efforts and ensuring that your investments deliver meaningful results.
Once we know what ROAS means, let’s break down the simple formula for calculating it!
ROAS Formula
Now that you understand ROAS, let’s look at how to calculate it. The formula is straightforward:
ROAS = Revenue attributable to ads / Cost of ads
For example, if you invest $100 in an ad campaign and generate $250 in revenue from the ad, your ROAS is 2.5. This means that you earned $2.50 in return for every dollar you spent.
With the formula in hand, it’s time to understand why ROAS is critical to your advertising success.
Why is ROAS Important?
ROAS is your go-to metric when it comes to figuring out whether your ad campaigns are actually working. Here are key reasons why tracking this metric is essential:
Identifies Campaign Success: ROAS highlights specific ads that effectively convert, allowing you to recognize successful strategies quickly.
Guides Investments: It helps you prioritize your advertising budget focus based on channels that are delivering the best returns.
Facilitates Adjustments: Regularly monitoring ROAS allows for real-time optimizations, ensuring that underperforming ads can be improved or paused.
Enhances Planning: Understanding ROAS contributes to long-term planning by informing future campaign strategies and budget allocations.
Supports Competitive Analysis: By comparing ROAS across different platforms or campaigns, you can benchmark performance and stay ahead of competitors.
Encourages Improvement: The metric fosters a culture of testing and refinement, pushing teams to innovate and adapt their marketing approaches.
Before we dive deeper into your ad performance, let’s clear up the difference between ROAS and ROI—two metrics that often get mixed up.
ROAS vs. ROI: What's the Difference?
Let’s break down two terms you’ll often hear when measuring your ad performance: ROAS and ROI. These two metrics are essential but focus on different parts of your marketing efforts. Here’s what they mean and why they matter for your business.
ROI (Return on Investment) looks at the big picture. It measures how much profit you’ve made after covering all your expenses—everything from production costs to shipping and staff. Essentially, it tells you whether your business is truly making money or not.
The ROI formula is simple:
ROI = (Revenue - Total Costs) / Total Costs
For example, if you run an E-Commerce campaign where you spend $10,000 on ads and generate a total revenue of $15,000, and if your total costs, including production and shipping, amount to $12,000, your ROI would be: ROI = (15,000 - 12,000)/12,000 = 0.25 or 25%. This means you’ve made a 25% return on your overall investment.
ROAS (Return on Ad Spend), on the other hand, focuses specifically on your advertising efforts. It measures the revenue generated directly from your ad spend, without factoring in other costs. If you want to gauge how efficiently your ads are performing, ROAS is the metric to consider.
The formula for ROAS metrics is:
ROAS = Revenue from Ads / Ad Spend
For instance, if you spend $1,000 on Facebook ads for a product launch and generate $3,000 in revenue from those ads, your ROAS would be: 3:1, meaning you made $3 back for every dollar spent on ads.
Now, here’s where it can get tricky. You could have a high ROAS—showing that your ads are performing well—while still having a negative ROI. For example, if those ads generate a great return (like a 3:1 ROAS), but your total costs for the product, including production, shipping, and labor, amount to $4,000, your overall ROI might still be negative.
In short, ROAS metrics tell you how well your ads are working, while ROI gives you the full story of your business’s profitability. Both are important, but they measure different things.
Now that we've cleared up the difference, let’s talk about setting realistic ROAS benchmarks for your campaigns.
Benchmarks and Goals for ROAS: What’s a Good Target?
So, what is a good ROAS benchmark? Generally speaking, a ROAS of 4:1 is often seen as a solid benchmark. However, ROAS depends on multiple factors, the first being the sector. For example, the average ROAS for E-Commerce PPC campiagns is 2.05:1. This means for every dollar you spend on ads, you’re making $2.05 back in revenue. For most businesses, that’s a pretty good return.
ROAS also depends on your industry and the specifics of your product. In E-Commerce, average ROAS can vary significantly based on factors such as the type of product, target audience, and market competition. For instance, if you’re selling high-end electronics with substantial profit margins, you might find that a ROAS of 2:1 is sufficient for profitability. In contrast, if you’re in the fast fashion sector with tighter margins, you’ll likely need a higher ROAS, such as 4:1, to cover costs and ensure your advertising efforts yield positive returns
Similarly, ROAS also depends on the platform. The average ROAS for different platforms is as follows:
The key is to set ROAS goals that fit your business. Think about your margins, how much you're willing to invest, and what your growth goals are. If you’re aiming to break even, your ROAS target will look different than if you’re trying to scale quickly.
After you’ve set your ROAS targets, the next step is to figure out how to use this data to fine-tune your campaigns. Let’s dive into that next.
Using ROAS Insights: How to Make Better Marketing Decisions
Once you’ve got your ROAS metrics in hand, what’s next? It’s not just about seeing a number; it’s about using that number to make smarter decisions that boost your marketing efforts.
First, ROAS gives you a clear picture of which marketing channels and campaigns drive the most revenue. For example, you might find that your Instagram ads outperform your Google ads or that a specific audience segment gives you a better return. This helps you see where your money is working hardest.
Second, it’s a great tool for guiding future budget decisions. If one campaign consistently delivers great results, shifting more of your budget to it is a good idea. On the other hand, if something isn’t performing well, you’ll know to adjust or cut that campaign before wasting more money.
Finally, when you combine ROAS with other metrics like CPA (Cost Per Acquisition) or CPC (Cost Per Click), you better understand how effective your campaigns are. ROAS and CPA are closely related, as ROAS measures the revenue earned for every dollar spent, while CPA focuses on the cost of acquiring a customer.
Lower CPA typically improves ROAS by reducing the cost per conversion, leading to higher returns. Looking at all these numbers together helps you fine-tune your strategy and maximize your returns.
Now that you understand how to use ROAS insights let’s look at some challenges you might face when calculating it.
Challenges in Calculating ROAS
While ROAS metrics are super helpful, getting an accurate number isn’t always easy. Here are a few challenges that can make it tricky:
Attribution Issues: Accurately calculating ROAS requires pinpointing which ads directly contribute to revenue. With customer journeys often spanning multiple touchpoints, it can be tricky to assign credit correctly. For example, if a customer clicks on an ad but makes a purchase later after seeing a social media post, determining how much credit each interaction deserves can complicate ROAS calculations.
Audience Tracking: Without robust tracking systems, it’s difficult to verify whether a customer purchased as a result of an ad. This challenge is heightened when ads run on platforms that inherently lack tracking capabilities, like TV or billboards, making it hard to connect revenue back to specific ads.
Behavioral Lags: Customers may take time to convert after viewing an ad, which can lead to discrepancies in ROAS measurements. If a team measures results too soon after a campaign launch, they might not capture the full impact of the ads, resulting in an incomplete picture of performance.
External Factors: Many uncontrollable elements can influence consumer behavior, such as economic conditions or competitor actions. These factors can affect purchasing decisions regardless of the quality or relevance of your advertising, complicating the assessment of your ROAS.
What we have learned makes it clear why understanding ROAS is essential for making informed marketing decisions. Let’s conclude by bringing it all together.
Conclusion
In short, ROAS metrics are critical in understanding how well your ad campaigns are performing. By calculating your ROAS, you can see exactly how much revenue your ads bring in and use that insight to make better marketing decisions. While calculating ROAS can be challenging due to multiple costs and platforms, having accurate data is key to optimizing your ad spend and driving growth.
At GoMarble, we help brands maximize their ROAS through our AI-assisted performance marketing solutions. Our dedicated team manages ad campaigns across major platforms like Facebook, Instagram, Google, and Amazon, ensuring your brand reaches the right audience. We also create high-quality ads that stand out, turning your raw ideas into engaging content that delivers results. By combining AI-driven insights with human creativity, we enhance your ad effectiveness and drive profitable growth.
Ready to scale your business with better ROAS? Book a demo with us today!