In this article, I will explain what ROAS in Marketing is, how to calculate it, and why it is essential to use it in analyzing your online business. Additionally, I will help you understand how to derive ROAS using common analytics tools. I will provide some calculation examples to simplify things. ROAS (Return On Advertising Spend) is the calculation of the return on advertising expenses and is used to measure the economic sustainability of a digital marketing campaign.
ROAS is crucial for informing your company and team about the performance and quality of your advertising campaigns. It provides valuable data for optimizing advertising spending. Without this calculation, it’s easy to waste advertising expenses and decrease the number of leads and sales derived from advertising. If this definition seems unclear to you, continue reading to clear any doubts and learn how to use this metric to improve your business!
This article will cover:
- the ROAS formula
- useful tips on how to calculate ROAS
- why it is important to use ROAS
- the difference between ROI and ROAS
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ROAS in Marketing: formula
REVENUE FROM CAMPAIGNS / ADVERTISING EXPENSES * 100
Wait, don’t turn up your nose… A few examples will help you better understand what ROAS is. Let’s assume that David launched a Google Ads campaign three months ago to increase t-shirt sales. The total cost of the campaign, including clicks and management, was $7,000.00. Meanwhile, David earned $20,000.00 from t-shirt sales. Now, let’s apply the formula to the example above: 20,000.00 / 7,000.00 * 100.
David’s ROAS is… $2.85 for every $1 spent, which is 285%. Impressive, right? David would be very satisfied with this result.
Another example? Mark manages an e-commerce website for selling children’s shoes online. To promote his website and generate more traffic, he decides to run Google Ads campaigns, which quickly brings in traffic. After a couple of months, Mark is eager to find out if his campaigns are making him profits.
Let’s assume his campaigns generate a total revenue of $12,000 each month, and using Google Ads costs him around $2,500 per month. Applying the formula to our data, we discover that
12,000 / 2,500 = 4.8 or 480%
This means that for every $1 spent on his campaigns, David earns around $4.80.
Is the concept clearer now?
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Useful tips for ROAS calculation
The advice I want to give you is to rely on competent professionals who can manage your campaigns and advise you on the most suitable channels for your business needs.
It’s important to know that companies can evaluate their ROAS goal only when they have a defined budget and secure management of profit margins. A large margin means the company can survive with a low ROAS, while smaller margins indicate that the company should keep advertising costs low.
Another helpful element in calculating the actual cost of an advertising campaign is to consider the following factors:
- Partner/Supplier costs: typically, there are expenses associated with partners and vendors who provide campaign or channel assistance. Accurate accounting of internal advertising personnel expenses such as salaries and other related costs must be tabulated. If this type of expense is not considered in the calculation, the utility of ROAS will decrease.
- Affiliate commission: the percentage commission paid to affiliates, as well as network transaction fees.
- Clicks and impressions: marketing metrics such as average cost per click, total number of clicks, average cost per thousand impressions, and actual purchased impressions.
These variables must be defined and calculated perfectly to obtain more reliable results. A general rule is:
If your ROAS is less than 3:1, reevaluate your marketing strategy; you are likely losing money.
With a ROAS of 4:1, your marketing is profitable.
If your ROAS is 5:1 or higher, things are working quite well.
In essence, if a particular element of your digital marketing (be it a campaign, ad group, ad, etc.) generates at least $3 for every $1 you invest, you are doing well. Of course, every company has a minimum sustainable profitability threshold, but this rule is a good starting point.
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Why use ROAS?
At this point, you might be thinking: okay, tracking advertising returns is complicated. Can’t I simply look at my click-through rate or my conversion rate and use that information to optimize my online advertising? The answer is NO. Remember, the primary goal of online advertising is to make money, not just generate traffic or conversions.
In fact, ROAS is a CRITICAL metric for companies investing in online advertising. Why? Simply because it allows you to evaluate the effectiveness of advertising campaigns in a clear and objective manner, helping to make informed decisions about budget allocation.
In the past, companies often relied on indicators of advertising campaign success, such as:
- the number of clicks
- ad impressions
However, these indicators do not provide a clear picture of the situation and do not allow understanding the actual value that advertising campaigns are generating for the company.
ROAS, on the other hand, takes into account not only the cost of advertising investment but also the value of the results obtained. In other words, it indicates how much money was earned in relation to how much was spent on advertising. For example, if an advertising campaign generated a ROAS of 3:1, it means that for every euro spent on advertising, the company earned three euros in sales.
Difference between ROI and ROAS
As mentioned earlier, ROAS stands for “Return on Advertising Spend” and is very similar to another important marketing metric, Return on Investment ROI. ROI is very useful for evaluating the overall effectiveness of your marketing efforts.
ROAS, on the other hand, is used to assess the effectiveness of a specific campaign, ad group, ad, or keyword. Return on Advertising Spend is an incredibly versatile way to evaluate any aspect of your online marketing. Want to know if a particular set of ads is worth your time and money? Check your ROAS. Want to know if the targeting changes you made are working? Check your ROAS.
ROAS and ROI are two metrics that advertisers tend to confuse. In fact, even though they are two different metrics, they significantly influence each other.
ROI (Return On Investment) measures the profitability of the capital invested by the company and can be used as a metric for any type of channel (you can explore your knowledge on Facebook ROI, for example). When the often-overlooked metric, the margin rate, is added, it is possible to identify actual profits and consequently calculate the actual ROI on channels. The formula for calculating ROI is as follows:
(Revenue x Margin) – Expenses) / Expenses) X 100
Taking Mark’s e-commerce as an example, let’s assume our company has a 20% margin. Applying the formula:
(12000 × 0.2) – 2500) / 2500) x 100 = – 21.42%
We can see that despite a positive ROAS (2.42), which reflects in terms of sales, our ROI here is negative because once we calculate the profit margin, we realize that the investment is no longer profitable. This teaches us that it is essential to evaluate the advertising channel you want to use for your campaigns. Now that you know the difference between the two metrics, you must always pay attention to separate the two indicators. This will allow a clear understanding of your investments, and you will see which lever is efficient, but also, and above all, whether it is profitable or not.
A column for calculating ROAS
The problem with calculating this metric is that the measurement column is not available on Google Ads, which is instead active on Analytics. To understand how to analyze ROAS, we have two methods, both involving custom columns.
1) From columns > modify columns, scroll down, and select “Custom columns.” Then click “+ Columns.” Here, we execute the following formula:
(Value all conversions / Cost) x 100 and request the value to be expressed as a Number (123).
This way, after saving the column, it will display the number expressed as a numeric value, which will be evaluated as a percentage. 110 will then be read as 110%.
2) The other version is simply inserting the formula:
Value all conversions / Cost and asking Google Ads to use a percentage number as the result. This way, once imported, the column will display the same value as before, but with the percentage applied as well.
What are the limits of ROAS?
Although ROAS is an important indicator to evaluate the effectiveness of online advertising campaigns, there are some limitations to consider. In particular, ROAS does not take into account certain factors that can influence the results of advertising campaigns, such as long-term customer value.
In fact, ROAS focuses only on short-term results, i.e., the sales generated immediately by the advertising campaign. However, this does not necessarily mean that a campaign with a high ROAS is always the best choice for a company. It might be more advantageous to invest in a campaign with a lower ROAS but a higher ROI if it leads to higher customer lifetime value.
The ROAS does not take into account other important factors such as the website visitor conversion rate or the long-term customer value. If an advertising campaign has a high ROAS but a low conversion rate, it would be better to review the marketing strategy to improve this parameter.
It’s important to know that ROAS does not provide a complete assessment of the effectiveness of online advertising campaigns. For this reason, businesses should use ROAS in combination with other indicators, such as conversion rate or customer acquisition cost, to more comprehensively evaluate the effectiveness of their online advertising campaigns.
ROAS is one of the most useful metrics for evaluating the effectiveness of your digital marketing campaigns. The main goal is to generate new revenue.
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