How to Calculate Return on Ad Spend (ROAS) – A Step-by-Step Guide

Return on ad spend (ROAS) is a key performance indicator that businesses use to measure the effectiveness of their advertising campaigns ROAS calculates how much revenue is generated for each dollar spent on ads. In this comprehensive guide, we will walk through everything you need to know about calculating ROAS, including the formula, examples, benchmarks, and tips for improvement

What is ROAS?

ROAS stands for return on ad spend. It is calculated by dividing the revenue generated from an ad campaign by the total cost of the ad campaign. For example, if an ad campaign cost $1,000 and generated $5,000 in revenue, the ROAS would be 5 ($5,000/$1,000).

Essentially, ROAS shows you how much bang you’re getting for your advertising buck – it reveals how profitable your ad spending is. The higher the ROAS, the better, because it means your ads are generating more revenue.

ROAS Calculation Formula

Here is the formula for calculating ROAS:

ROAS = (Revenue from ad campaigns / Total ad spend) x 100

Let’s break this down step-by-step:

1. Determine the total revenue generated from the ad campaign – This includes all sales, leads and any other revenue attributable to the ad spend.

2. Calculate the total ad spend – This includes the cost of the ad platform and any other expenses directly related to the campaign like design, copywriting, etc.

3. Divide revenue by ad spend – Revenue / Ad spend.

4. Multiply by 100 – To convert to a percentage.

So in simple terms, ROAS equals the amount of revenue earned per $1 spent on ads.

ROAS Calculation Example

Let’s look at a quick example to illustrate how ROAS is calculated:

• You run a Facebook ad campaign that costs $5,000 total
• The campaign generates $20,000 in revenue
• ROAS = ($20,000 revenue / $5,000 ad spend) x 100 = 400%

Therefore, the ROAS for this hypothetical campaign is 400%. For every $1 spent on ads, $4 was generated in revenue.

What is a Good ROAS?

Since ROAS measures advertising profitability, the higher ROAS the better. However, what qualifies as a “good” ROAS depends on your profit margins and industry.

As a general benchmark:

• ROAS below 100% means you’re losing money
• 100-200% is often break-even
• 200-300% is respectable
• 300%+ is excellent

However, the ROAS needed to turn a profit varies significantly based on profit margins. For low-margin businesses like retail, ROAS may need to be 500%+ to be profitable. High-margin software businesses can be profitable at 100-200% ROAS.

The key is to analyze your profit margins and set ROAS goals accordingly. Test different campaigns and aim to exceed your target over time.

How to Improve ROAS

Here are some tips to improve ROAS for your ad campaigns:

Target your ads precisely – Proper targeting is essential. Only advertise to people likely to be interested in your products/services. Use tools like Facebook’s Audience Insights to research your target demographics.

Test multiple ad variations – Test different messaging, visuals, and call-to-action to see what resonates best with your audience. A/B test ads before rolling out full campaigns.

Track conversions – Make sure you can track sales directly from your ads. Use UTM campaign parameters and conversion pixels to accurately measure revenue.

Analyze and optimize – Continuously analyze your ad performance and make tweaks to underperforming elements. Kill bad ads quickly and scale winners.

Measure ROI beyond sales – Don’t just look at direct sales. Also track leads, sign-ups, and other engagement metrics. All contribute to long-term ROI.

Review targeting over time – Audience interests change. Re-visit your targeting periodically to ensure your ads are reaching the right people.

With regular optimization and testing, you can consistently improve ROAS and get more value from your ad budgets.

ROAS vs ROI

ROAS is often confused with the similar metric ROI, or return on investment. They measure related but distinct things:

• ROAS – Revenue return from ad spending specifically

• ROI – Revenue return from overall investment (ads, staff, inventory, etc)

While ROAS focuses just on ad profitability, ROI looks at profitability of the overall business. To boost ROI, you need to focus on bigger picture strategies beyond just your advertising.

ROAS Calculator

Figuring ROAS manually can be tedious. To make it easy, use this free ROAS calculator:

[Embed ROAS calculator]

Simply plug in your:

• Ad spend
• Revenue generated

And the calculator will determine your campaign’s ROAS automatically. Give it a try!

Real World ROAS Examples

To give you a sense of real-world ROAS benchmarks, here are some examples across different industries:

• Ecommerce – 200-400%+ ROAS is common for online retail ads.

• SaaS – These high-margin software companies can profit at 100-200% ROAS.

• Lead Gen – Thanks to low CAC, insurance and education ads often see 300-500%+ ROAS.

• Non-Profits – Charities often achieve 100-300% ROAS on donation campaign ads.

ROAS requirements vary widely. Comparing your ROAS to industry benchmarks helps provide context on campaign performance.

Tracking ROAS in Google Ads

For Google Ads users, you can easily track ROAS in your account dashboard. Here’s how:

1. Navigate to the dashboard in your Google Ads account.

2. Locate the “Return on ad spend” metric card.

3. Review the ROAS percentage over any date range.

4. Click into the graph to see ROAS broken down by campaign, ad group, etc.

This makes it simple to monitor the profitability of your Google Ads activity. ROAS is also available for other paid platforms like Facebook Ads.

ROAS Best Practices

To recap, here are some best practices for optimizing return on ad spend:

• Set a target ROAS based on profit margins
• Precisely target your audience
• Regularly test and tweak ads
• Track conversions and revenue
• Kill underperforming ads quickly
• Review targeting as audience interests evolve
• Compare your ROAS to industry benchmarks
• Use a ROAS calculator to determine campaign profitability

Applying these tips will help maximize the impact of your ad budgets. ROAS is one of the most important metrics for measuring ad performance, so monitor it closely.