Easy, Flat-Fact Guide to Return-on-Ad-Spending (ROAS)
If you’re into marketing, you’ve got to analyze data and gauge the efficacy of all your marketing efforts, from marketing campaigns right down to individual blog articles. That means you’ll need to get comfy with a bit of math! Even if finance and mathematics aren’t your go-to Friday night fun machines, you’ve got to at least learn to track what’s called “return-on-ad-spend” (ROAS).
Defining ROAS for the Uninitiated
Return-on-ad-spend represents a metric for measuring generated revenue vs. however much you spent on the relevant ad campaign. So imagine you made $5 for every $0.50 that you spent on your latest ad campaign. We measure ROAS in ratios, so in this case, your return value would be 10:1… Not bad! We’ll take five bucks over 50 cents any day, and you don’t have to be an economics professor to see why.
So at the end of the day, ROAS is used to evaluate how effective your ad campaign is.
As a side note here, don’t confuse ROAS with overall return-on-investment (ROI), the latter being a broader measure of total profits vs. expenditure. You could have a great ROAS, for example, but poor overall ROI. ROAS just tells you, in some very broad terms, whether you ought to reevaluate your current ad strategy.
An addition to ROAS and ROI, you’ll want to measure click-through rate (CTR). Have you had your fill of fun acronyms yet? These measures—and others—are all important in getting the most accurate possible overview of your end results. For now, however, we’re going to focus on ROAS and how best to go about using it to run a successful ad campaign.
Calculate ROAS Like a Grizzled Marketing Veteran
To calculate ROAS, you basically just need to remember a simple equation: Revenue Generated from Ads (AR) divided by Ad Cost (AC). You can represent this with a simple little equation that looks like this: AR/AC.
Not too difficult, right?
This equation produces a helpful ratio that you can then use to make an assessment of your ad campaign’s general efficacy. But here’s the tricky part (you knew there would be one): though this equation is easy to render, you still have to gather all the data that equation needs, and this step isn’t always so straightforward. For instance, how do you calculate the cost of a given ad? You’ve got to factor in the cost of your bid for the ad, the labor cost of creative parties and assets used to produce the ad, the cost of relevant vendors, and affiliate commissions.
Yikes! This got murky really fast.
As a marketer, you have to have an accurate estimate of the actual money you spent on the ad in question. It might go without saying, but if your estimate is off, then your ROAS calculation will be as well… Meaning that you won’t really know how well your ad campaign is doing.
Is My ROAS Good?
Good question! The answer may not satisfy you though: There’s no predefined “good” ROAS. Good ROAS’s tend to vary across campaigns and industries. In fact, sometimes, a lower ROAS isn’t even a bad sign! That said, a ROAS of at least 4:1 is, generally speaking, a benchmark you should try to hit. Now, if you do find you have a problematically low ROAS, start by double-checking the data – are you correctly calculating the revenue and costs?
And as mentioned, remember that a lower ROAS doesn’t strictly imply a struggling campaign.
If you’re using banner ads, for instance, these tend to have relatively low CTRs. they’re still good for increasing brand awareness, though, so that lower ROAS may be negligible. Alternatively, if you’re moving into new marketing territory, a low ROAS may simply indicate that you’re trying to gain traction, which is quite normal.
And if your ROAS is still looking like the runt of the litter, so to speak, you can try improving it by lowering your ad spend as you review the struggling campaign(s). Optimizing your landing pages is always a good idea, and you should scan your ad content for negative keywords. This can all be tough territory to navigate, but remember that, after making changes, you need to give it some time to see if any positive changes result.
Don’t make the mistake of making too many changes at once at random intervals. Carefully plan and document everything you do so you can make clear determinations about what works and what doesn’t.
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