Return on ad spend (ROAS) is a common term used in marketing and advertising, but it can be used across all industries that spend on ads. It’s a metric that states the amount earned for every dollar spent on advertising.
Return on Ad Spend Formula
Return on ad spend is one of the easiest metrics to measure. Here is the formula for calculating ROAS:
(Total revenue generated / Amount spent on the campaign) = Revenue-to-Spend Ratio
If your company spent 1,000 on pay-per-click (PPC) ads in March, for example, and revenue generated came to $5,000, then your ROAS for the PPC advertising campaign is ($5,000/$1,000), or your campaign generated $5 in revenue. Another way to look at it is that for every $1 you spent, you generated $5 in revenue.
Comparing ROAS across multiple campaigns will help you determine how much you should spend on future ad campaigns, how often you should run campaigns, and even whether it would be beneficial to increase or reduce your ad budget.
Why you Need to Know Your ROAS
Calculating ROAS lets you see exactly how much revenue an individual campaign has generated. And when you calculate the ROAS for multiple campaigns and compare returns side-by-side, you can get a clearer picture of the impact your marketing efforts are having on your audience and which type of ads or time or date of ad placement generates better results.
You can also home in on smaller details, like comparing whether you generate higher returns on PPC ads versus display or social media ads. Knowing your ROAS is one of the best ways to reduce spending on the marketing strategies that produce fewer returns.
ROAS vs. Return on Investment
Return on ad spend looks at how much revenue is generated from ads (and can include other marketing strategies, too). But return on investment (ROI) is purely a profitability metric. It’s determined by calculating revenue generated after subtracting costs, including overhead expenses to advertising, supplies, and payroll costs. One thing ROAS and ROI have in common is that your goal is for the “return” to be higher than the “spend” and the “investment.”
What is considered a good ROAS?
What you may believe is an acceptable ROAS may be considered extremely slim earnings by someone else. That’s because advertising budgets and earnings on those campaigns are influenced by too many different factors to count, including, but not limited to, a company’s operating costs, profit margins, and ROI. For a 5-year old profitable business, a 4:1 ROAS ratio is considered a “common benchmark,” according to SaaS platform, BigCommerce. On the other hand, while startups that are operating in the red would likely be pleased with earning $4 for every $1 spent on ads, realistically, young businesses have to expect their spend will outpace their earnings.