Return on ad spend (ROAS) is an important key performance indicator (KPI) in online and mobile marketing. It refers to the amount of revenue that is earned for every dollar spent on a campaign. Based on the return on investment (ROI) principle, it shows the profit achieved for each advertising expense and can be measured both on a high level and on a more granular basis.
Whether you want to measure ROAS for an entire marketing strategy or look at performance at the campaign, targeting, or ad level, it’s a key metric for measuring and determining strategic success in mobile advertising.
Return on ad spend (ROAS) is one of the most important metrics marketers should track. However, the term can seem confusing and intimidating, especially for non-math inclined folks like myself.
In this article, I’ll explain return on ad spend in simple terms to help you better understand this vital concept. Whether you’re new to marketing or a seasoned pro, a refresher on ROAS can ensure you’re getting the most bang for your buck.
What Does Return on Ad Spend Mean?
At its core, return on ad spend refers to the revenue generated per dollar spent on advertising. It’s calculated by dividing the total revenue by the total ad spend.
For example, if a marketing campaign cost $1,000 and generated $5,000 in revenue, the ROAS would be 5 ($5,000 revenue / $1,000 ad spend). This means for every $1 spent on ads, $5 was made in return.
ROAS shows how efficiently advertising spend is converting into revenue. The higher the number the better.
Why ROAS Matters
ROAS helps you determine if your ads are profitable. Let’s say you run a Facebook ad campaign that costs $10,000 and brings in $20,000 in revenue. The ROAS is 2 ($20,000 / $10,000).
Since you’re making $2 for every $1 spent, your ads are profitable. However, if the campaign only generated $5,000, the ROAS would be 0.5. That tells you the ads are losing money and you need to make changes.
Beyond profitability, ROAS shows which campaigns perform best. For example, if Campaign A has an ROAS of 1.5 and Campaign B has an ROAS of 3, Campaign B is generating twice as much revenue per ad dollar.
By tracking ROAS over time, you can see how your advertising strategies and campaigns stack up against each other. This allows you to double down on what works and cut what doesn’t.
ROAS vs. ROI
ROAS is often confused with return on investment (ROI). While they sound similar, these metrics calculate different things.
ROI looks at overall profitability by comparing net profit to total investment. It provides a big-picture view of whether your business endeavors are worthwhile.
ROAS zooms in specifically on advertising efforts. It tells you how well your ad spend is converting, regardless of other expenses impacting your net profit.
To summarize:
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ROI measures overall profitability
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ROAS measures advertising efficiency
Tracking both these metrics together gives you a comprehensive view of your marketing and business performance.
How to Calculate ROAS
Figuring out your ROAS is straightforward:
ROAS = Revenue / Ad Spend
Let’s walk through an example:
- You run a Facebook ad campaign for $1,500
- The campaign generates $4,500 in revenue
ROAS = Revenue / Ad Spend
= $4,500 / $1,500
= 3
Based on this, you’re earning $3 for every $1 you spend on this Facebook campaign.
When calculating ROAS, there are a few key things to keep in mind:
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Use gross revenue, not net profit. ROAS focuses purely on the sales driving ability of your ads.
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Include all ad costs like creative work, tools/software, agency fees. ROAS looks at your entire advertising investment.
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Tie revenue directly to ads if possible. This gives you the clearest picture of your ads’ impact.
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Use longer time frames like months or quarters vs days or weeks. This accounts for lag between ads and sales.
What’s a Good ROAS?
There isn’t a one-size-fits-all ROAS goal. The ideal number depends on your profit margins, industry, business model, and more.
As a general rule of thumb:
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ROAS of 1 means your ads are break-even. You’re making back what you spend but not profiting.
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ROAS of 2 is often a minimum threshold for profitable ads. However, take into account your profit margins.
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ROAS of 3+ is typically seen as a good benchmark across many industries.
The higher your ROAS, the better since that means your ads are highly effective at converting spend into revenue.
How to Increase ROAS
If your ROAS is lackluster, there are several ways to give it a boost:
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Improve landing pages to drive more conversions from traffic. Clear messaging, easy navigation, and seamless checkout tend to work best.
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Refine target audience so your ads reach people more likely to buy. Leverage analytics for insights on your best-performing segments.
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Test ad creative such as different formats, messages, etc. See what resonates most with your audience.
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Analyze campaign performance and weed out low-performing elements. Double down on what succeeds.
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Review bidding strategy and find opportunities to reduce average cost per click/conversion.
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Enhance email/CRM workflows to nurture leads into customers. Great ads alone don’t guarantee sales.
Tools to Track ROAS
Manually calculating ROAS using spreadsheets can get cumbersome. Marketing automation and analytics platforms can do the heavy lifting for you.
Here are some popular tools that measure ROAS:
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Google Analytics – connects campaign spend with conversion data to track ROAS in-depth.
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Facebook Ads Manager – provides campaign cost and revenue data to easily monitor ROAS.
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HubSpot – integrates ads management with CRM to track sales by campaign and source.
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Adobe Analytics – uses data connectors and models to uncover multidimensional ROAS insights.
No matter which tool you use, the key is tracking ROAS consistently across campaigns over time. Trend analysis trumps any single data point.
Monitoring ROAS sheds light on how profitable your ads are. With this key metric at your fingertips, you can invest your marketing dollars where they count and eliminate waste.
While the math behind it is simple, ROAS reveals incredible insights on your business growth. Master this fundamental concept, and you’ll be well on your way to amplifying your marketing ROI.
What is the difference between ROAS and ROI?
ROAS refers to return on ad spend, while ROI refers to return on investment. When calculating ROI, you’re looking at measuring the return on a particular investment relative to what the cost of that investment was. It’s a calculation of your net profit and the investment, with a formula that generally looks like this:
ROI = (Net profit / net investment) x 100
While similar but not the same, ROAS aims to help advertisers and marketers determine the overall efficiency of online or mobile marketing campaigns by calculating the exact amount of money that is earnt from a campaign relative to the exact amount of money that was invested.
One important takeaway is that a negative ROI can still be a positive ROAS, because your overall investment might be higher than the profit generated, but relative to the investment in the advertising campaigns themselves (depending on how you calculate that), the ROAS itself can be positive.
How to calculate and express return on ad spend
The basic formula for calculating return on ad spend is:
ROAS = revenue attributable to ads / cost of ads (ad spend)
To better understand this, let’s say you ran an ad campaign and spent $1000 on ads that you can attribute $3000 revenue to. Using the above formula, you can determine an ROAS of $3.
When it comes to expressing your ROAS, there are a few different options. The most common expression is a ratio showing what you made against what you spent. In the above example, your ROAS would be written as 3:1 ($3 revenue for every $1 spent).
If you prefer to express your ROAS as a percentage, multiply your result by 100. In the above example, your ROAS would be 300%.
Calculating ROAS becomes a little bit more complicated when determining what the cost of ads is, and there are a couple of decisions to be made. Firstly, you need to determine whether you want to track the dollar amount spent on a specific platform, or if you want to bundle extra advertising costs in. For example:
- Vendor costs: Vendors you work with will most likely take commission fees for running the ad campaign.
- Team costs: You need to pay a person to set-up and manage the campaigns, whether they’re in-house or at an agency.
The way you define ‘cost of ads’ in your ROAS calculation will depend on the type of campaign you’re running. Sometimes it’s most effective to work solely with the exact ad costs, and then create a separate ROAS that incorporates all collateral ad expenditure. This way you’ll have visibility on the overall performance and profitability of every campaign for which ROAS is a KPI.
What is ROAS? Advertising and Marketing ROAS Explained for Beginners
What is return on advertising spend?
Return on advertising spend, or ROAS, is a measurement used in the world of advertising to compare revenue to the cost of advertising campaigns. The goal of the calculation is to measure the effectiveness of a marketing campaign. Learn how to calculate ROAS, what this equation can tell you, and the limitations of this measurement.
How do you calculate return on ad spend?
To calculate return on ad spend, divide the total advertising revenue by the total cost to run the ad. Multiply the result by 100 to get the ROAS percentage. ROAS is most helpful for marketing and advertising teams looking to optimize their advertising results, including performance marketing, growth marketing, and demand gen roles.
What is return on ad spend (ROAS)?
The Return on Ad Spend (ROAS) measures the revenue earned for each dollar spent on marketing and advertising initiatives. Conceptually, ROAS is practically identical to the return on investment (ROI) metric, but specific to the context of analyzing advertising spend. How to Calculate Return on Ad Spend (ROAS)?
What is a good return on ad spend?
A good ROAS is usually a 4:1 ratio — $4 in revenue to $1 in ad costs. A good ROAS is usually a 4:1 ratio — $4 in revenue to $1 in ad costs. There is no right answer, however, because some businesses might need more or less revenue to operate. The average return on ad spend is 2:1 — $2 in revenue to $1 in ad costs. What determines a good ROAS?
