- Determine the revenue from your advertising source.
- Divide the revenue by the cost of the advertising.
- Multiply the result by 100 to get the percentage ROAS.
- If your ROAS is less than 100%, your advertising is at a loss.
Ecommerce businesses rely on advertisements, especially in the early stages when brand awareness is low. As a result, one of the biggest costs they have to pay in order to raise their revenue is advertising. 46% of the most popular e-commerce sites spend up to $1,000 per month on advertising.
Investment and return on investment are the two most important factors in business. Therefore, you’ll be asking yourself questions like: Is this a good investment? Do my ads fully exploit the sales potential of my good or service? Are they superior to those of my competition? Are we running ads in the appropriate locations, or should we switch from, say, Facebook to Google?
Google Ads Return On Ad Spend Formula – How To Calculate Return On Ad Spend (ROAS) In Google Ads?
Why is ROAS important?
ROAS is significant because it provides businesses with critical information about the effectiveness of their e-commerce and online marketing strategies. They can determine whether their advertising campaigns are resulting in high customer spending and conversation rates, ultimately generating high levels of revenue. Knowing which marketing tactics are most successful can help with decisions in the future regarding budgets, resource allocation, departmental direction, and other business-related issues. In general, ROAS assists businesses in maximizing their outreach initiatives to draw in and keep as many clients as possible.
Compared to some other metrics, such as CPA, cost per acquisition, or cost per conversion, ROAS may offer more advantages. ROAS measures costs and benefits, expressing the true value conversions bring to a business, while CPA only measures costs. Even though two distinct ad campaigns may have identical conversion costs, ROAS may indicate that one generates significantly more revenue than the other. Businesses can make high-impact investments to guarantee high-quality interactions with customers, earn sizable returns, and effectively manage money. Implementing the following changes may be necessary to optimize conversion rates and revenue:
What is return on ad spent?
Return on ad spent is a metric for monitoring the sales that advertisements bring in to a company. It is a particular kind of return on investment (ROI), a term used to describe the amount of money you make in exchange for the time, money, and effort you put into an activity. Companies run marketing campaigns to promote a product, draw clients, and ultimately succeed financially. Regular sales and income are essential to a business’s ability to function, and advertisements can help with that. ROAS evaluates the efficiency of marketing initiatives and their value as a use of resources.
The higher a companys ROAS, the better its fiscal health. Making money on the introduction of a new product is especially dependent on having a good ROAS of at least a 4:1 ratio. At the account, campaign, or ad group level, business leaders and marketers can track ROAS to determine whether their advertising efforts are successful. ROAS typically refers to digital advertisements and data-driven campaigns. Along with ROAS, there are a variety of other metrics that a business can monitor to track customer information and engagement, like:
How to calculate return on ad spent
Although ROAS is a potent metric, its calculation is fairly straightforward. Heres how to do so in four steps:
1. Find your conversion value
The amount of money a business makes from each conversion is known as conversion value. A conversion occurs when a user of a website, advertisement, or other online platform purchases something. They can do this by purchasing a product or service. The price of the good or service you sell is typically the conversion value. Additionally, it only refers to the money a business makes from the sale of the good or service. For instance, if a product costs $100, its conversion value is also $100. If a customer purchases the product, the company will make $100.
You could measure conversion value per unit or track total conversion value over a selected time period, like a week, month, or quarter, depending on your goals and preferences. Additionally, businesses can set up automatic tracking for conversion values using specific software, either by allocating a flat rate to each action or a dynamic amount based on particular transactions. The dynamic feature is common in e-commerce business applications. Additionally, you can determine your conversion rate in person to determine your flat rate or the success of your in-person marketing. Heres how:
2. Find your advertising cost
Next, determine your advertising cost. Once more, if you decide to calculate your ROAS over a period, you can use the overall cost of all your advertising. If not, you could use advertising cost per unit. It’s crucial to factor in all marketing-related costs in this amount to get a precise result from your calculation. Advertising costs could include the following factors:
3. Perform the calculation using the formula
You’ll have all the information you need to use the formula once you’ve determined the conversion value and the advertising cost. Regardless of how narrow or broad is required, you can calculate the ROAS for a single transaction or a group of transactions over a period. If you’d like, you can also multiply the result by 100 to get a percentage. Particularly for those who are unfamiliar with marketing metrics, percentages can be simpler to work with and comprehend. To senior executives, colleagues, or even clients, they can be effective communication tools.
4. Evaluate this metric at regular intervals over time
Recalculating return on ad spend at regular intervals over time is a crucial step in the process. This can help you develop a thorough understanding of how ROAS varies throughout the year and due to new, novel marketing strategies. Additionally, repeated data collection can help you develop your skills and produce more thorough, accurate results. You can keep an eye on this data, make goals, and monitor your progress by spending money on online ROAS software. Setting goals is a great way to increase the likelihood of achieving the desired result.
Examples of calculating return on ad spent
Viewing illustrations of ROAS calculations could help you comprehend the idea more clearly. Here are three examples of this process:
Example 1
John works for an interior design firm’s marketing division. In order to evaluate the department’s performance, he chooses to compute the ROAS for the month. His main objective is to determine whether he is allocating the proper funds to the various advertising campaigns the team is currently running. Heres his calculation for a social media ad campaign:
ROAS = $20,000 / $2,000
ROAS = 10
Heres his calculation for an email ad campaign:
ROAS = conversion value / advertising cost
ROAS = $8,000 / $2,000
ROAS = 4
Even though the cost per conversion or advertising costs are the same, John discovers that the social media ad campaign has a higher ROAS than the email ad campaign. This is due to the fact that the two activities’ conversion values, or revenues, are different. He shares this with his coworkers, and they decide to increase funding for the social media campaign because it appears to be more successful at engaging audiences and bringing in money for the company.
Example 2
Linda is a marketer for a local farm. She decides to calculate the return on ad spend for one advertisement because she wants to know the precise impact her online advertisements are having on viewers. She determines that the cost of advertising will be $100, taking into account the time required to design the advertisement, the cost of the specialized tools she uses, and the going rate in the market for her caliber of work. She then determines that the ad’s conversion value was $500 because it was successful in bringing in a customer. Here are her calculations:
ROAS = $500 / $100
ROAS = 5
Linda finds that her return on ad spent is 500%. This indicates that consumers responded favorably to this particular advertisement, she realizes. To get a bigger picture, she later calculates the month’s total ROAS.
Example 3
Grant and Jesse collaborate on a sales team for a tech company. They choose to test ROAS and calculate it for their face-to-face interactions with potential customers. They first calculate the conversion value:
Average lead to close rate times average value per close equals conversion value.
Conversion value = 0.5 x $500
Conversion value = $250
The team then determines the return on investment for lead generation efforts:
ROAS = conversion value / advertising cost
ROAS = $250 / $30
ROAS = 8.33
FAQ
What is return on ad spent?
Return On Advertising Spend (ROAS), a marketing metric, is used to assess the success of digital advertising campaigns. Online businesses can use ROAS to assess which advertising strategies are effective and how they can make improvements going forward.
What is a good return on ad spend percentage?
A larger Google Ads budget may result from generating a higher ROAS, giving you even more room to promote your business’s success. Any ROAS for Google Ads that is above 400%, or a 4:1 return, is considered good. In some cases, businesses may aim even higher than 400%.
What is a 300% ROAS?
Say your company’s AdWords campaigns have a ROAS of 300%. This indicates that for every $1 spent on AdWords, you made $3 in profit. That leaves you with $2. If the item costs $1 and your profit is $50 of that item, you are left with $0.
