Return on Ad Spend (ROAS) is a key metric in digital marketing that tells you how effectively your advertising dollars are generating revenue. By calculating ROAS, you can determine which campaigns are working and where to allocate more budget to maximize profitability.
What is Return on Ad Spend (ROAS)?
ROAS, or Return on Ad Spend, is a marketing metric that measures the revenue you generate for every dollar spent on advertising. Unlike broader metrics like ROI (Return on Investment), ROAS focuses specifically on the performance of your ad campaigns. It provides insights into how effectively each dollar spent on ads drives revenue.
If you're running multiple campaigns across platforms like Facebook (Meta), Google Ads, or Shopify, ROAS helps you evaluate which ones are working best. However, it’s important to note that ROAS isn’t a holistic business metric—it focuses solely on the effectiveness of your advertising spend, not your overall profitability.
How to Calculate Return on Ad Spend (ROAS)? Formula Included
At its core, ROAS is calculated by dividing the revenue attributed to the ad spend by the total ad spend. To break it down:
- Attributed Revenue (Return): The revenue directly tied to the ad spend, typically pulled from an attribution tool like Meta's Ads Manager or Google Ads. It's essential that this revenue is directly connected to the campaign and does not include organic or email-driven revenue.
- Ad Spend: The total cost of the ad campaign, which can also include variable costs such as agency fees, platform fees, or other incremental expenses tied to the ad's performance.
Key Factors That Affect Return on Ad Spend (ROAS) Accuracy
- Attribution:
- ROAS calculations rely on accurate attribution of revenue to ad spend. This can be challenging, as attribution models may vary and can sometimes be imperfect. For example, platforms like Meta often use a 7-day click attribution model to estimate how much revenue can be traced back to a specific ad. This isn’t 100% accurate but gives a reasonable direction for optimization.
- Consistency:
- Even though attribution is not perfect, it’s crucial to consistently use the same model when calculating ROAS to make valid comparisons between campaigns.
- Variable Costs:
- Some businesses include additional variable costs (e.g., agency fees, incremental costs) in their ad spend calculations. This provides a more comprehensive view of the true cost of advertising.
Return on Ad Spend (ROAS) Calculator
We’ve created a free online ROAS calculator to help you quickly measure how well your ad campaigns are performing. Use our ROAS calculator to simplify your process and stay on top of your advertising efficiency.
For those seeking a more comprehensive solution of ecommerce metrics, VisionLabs offers custom dashboards that reveal your profit drivers, backed by expert strategists who turn data into action – all without the hassle of building an in-house team. If you want to know more, check our ecommerce data services
Return on Ad Spend (ROAS) Examples
Let’s look at a few practical examples to better understand ROAS:
- Simple Calculation:
- Suppose you spent $1,000 on a campaign, and it generated $1,500 in attributed revenue. $1,500 / $1,000 = 1.5. The ROAS would be 1.5.
1500.0 / 1000.0 AS roas; -- Result: 2
This means for every $1 spent, you generated $1.50 in revenue.
- Multiple Campaigns:
- For a more complex example, consider multiple campaigns with varying spends and revenues:
SELECT campaign_id, SUM(attributed_revenue) / SUM(ad_spend) AS roas FROM ad_campaigns GROUP BY campaign_id;
This query breaks down the ROAS by each campaign, allowing you to compare their effectiveness.
Return on Ad Spend (ROAS) on Meta Ads (Facebook/ Instagram)
When using Meta’s Ads Manager, a common approach is to rely on the 7-day click attribution model. For example, if Meta reports $1,500 in attributed revenue from a $1,000 spend, your ROAS would be 1.5, as shown above.
Return on Ad Spend (ROAS) on Google Ads
ROAS here is calculated similarly but can be influenced by attribution windows like last-click or data-driven attribution, which may vary the revenue reported.
How to Improve Return on Ad Spend (ROAS)
Improving your ROAS involves fine-tuning both the cost side (ad spend) and the revenue side (conversion rate, average order value). Here are some strategies:
- Optimize Your Conversion Rate (CRO): A higher conversion rate directly boosts ROAS. By improving your website’s user experience, simplifying checkout, and using compelling CTAs, you’ll convert more visitors into paying customers.
- Increase Your Average Order Value (AOV): Offering upsells, cross-sells, or bundles can increase the revenue per transaction, which boosts ROAS without needing more ad spend.
- Target More Relevant Audiences: Use precise targeting options in platforms like Google Ads and Facebook to reach audiences who are more likely to convert.
- Refine Your Creative: Ads that resonate with your audience can drive higher engagement and more conversions, positively impacting your ROAS.
- Leverage Retargeting: Use retargeting ads to bring back users who previously interacted with your website but didn’t convert.
Benchmarks: What’s a Good Return on Ad Spend (ROAS) in Ecommerce?
A "good" ROAS can vary depending on your business, industry, and goals. However, a common benchmark for eCommerce businesses is a ROAS of 3:1, meaning you earn $3 for every $1 spent.
It’s also essential to consider your break-even ROAS. This is the minimum ROAS required to cover your ad costs and other expenses. For example, if your break-even ROAS is 1.8, you need at least $1.80 for every dollar spent to stay profitable.
Why is Return on Ad Spend (ROAS) Important to Marketers?
ROAS helps marketers measure the effectiveness of their advertising campaigns. It provides valuable insights into which campaigns are driving the most revenue and which ones need adjustments or cuts. For performance marketers, ROAS is a key metric for deciding whether to scale, pause, or optimize ad campaigns. However, it is not a holistic business metric and should not be used in isolation for overall business performance evaluation.
Moreover, ROAS helps in budget allocation. If certain platforms, ad sets, or campaigns yield higher returns, marketers can shift their budgets to maximize profitability.
Return on Ad Spend (ROAS) vs. ROI (Return on Investment)
While ROAS and ROI are often used interchangeably, they measure different things. ROAS focuses only on the revenue generated from ad spend, while ROI considers the broader picture, including other business costs like overhead and product costs.
ROI=Net Profit / Total Investment
ROI gives you a comprehensive view of overall business profitability, whereas ROAS zeros in on the effectiveness of your ads.
FAQs
Can Return on Ad Spend (ROAS) be too high?
A very high ROAS may indicate that you’re not scaling aggressively enough. If you’re getting significant returns, consider increasing your ad spend to maximize growth.
Should I include agency fees in Return on Ad Spend (ROAS) calculations?
It depends on your goals. Some marketers include additional costs like agency fees for a more comprehensive view of advertising expenses, but typically, ROAS focuses solely on ad spend.
How does conversion rate affect Return on Ad Spend (ROAS)?
Conversion rate has a direct impact on ROAS. The higher your conversion rate, the more revenue you generate from your ads, improving your ROAS.
By understanding and optimizing ROAS, you can make informed decisions about marketing strategies, ensuring that their ad spend generates the maximum possible revenue.
While ROAS is a powerful tool for ad buyers, it should be used in conjunction with other metrics like AOV, conversion rate, and CAC to provide a complete picture of marketing performance and business health.
By regularly monitoring and optimizing ROAS, you can improve the efficiency of your marketing efforts and drive sustained growth for your ecommerce business.