What is Return-on-Ad Spending and Why Does My Business Depend on It?

Return-on-Ad Spend is the ratio of advertising spend to new products or services both online and offline. The RTAS is a ratio between 1 and 100, i.e. if you were spending 1% of sales on advertising, then your RTAS would be 100. For eCommerce websites, the measure is a ratio of advertising spend to sales, i.e. If you were spending $100 on advertising, then your RTAS would be 10.

Now, there are two major indicators used for measuring RTAS. The first is total advertising spend, which calculates advertising expenses and sales. The second is retail sales. which calculates revenues generated by advertising. The remaining two metrics that are used to calculate RTAS are discount rates and marketing expenses.

Discount Rates

Discount rates are an important indicator used to calculate return-on-ad spend. This indicator calculates discounts offered to shoppers to offset the cost of the advertisement. It can be a simple price difference in the shopping cart or a percentage discount on the final price.

Retailers spend a considerable amount of marketing efforts on discounting products and promotions to increase their sales. Therefore, we should not be surprised to see a high percentage of the RTAS percentage that includes a discount.

Marketing Expenses

The marketing expenses of a website are mainly the cost of running ads, buying traffic, creating content, and so on. If a website runs a lot of ads, it makes it easier for that site to calculate its return-on-advertising spend. However, in some cases, it is more important to compare a website’s RTAS to its competitors, or the price of the product being sold, rather than the marketing expenses. 

In some cases, we might be lucky to get a website with high return-on-advertising spend—but at a high marketing expense, rather than a website that has high return-on-advertising spend and a low marketing expense. In cases like that, the marketing expenses should be taken into account as well since its payment is based on a percentage of the sales.

Advertising Spend

A company should spend a part of its advertising budget on advertising in order to get the best return. However, it should not be the major part of its advertising budget.

But it should not be the smallest part either. However, if you compare a website with low advertising spend with one with higher advertising spend, you should focus on the difference. Therefore, it would be wise to first calculate the revenue from the advertisements the website offers, and then calculate its advertising budget.

Now, it is essential to see the two reports together, i.e. the marketing spend and the advertising spend. Now, you can compare the two. The information that comes from the advertising spend report should be combined with the marketing spend report, and we can get a clear idea about how well the advertisements are doing for the website.

How Do I Calculate Return-on-Ad Spend?

Return-on-Ad Spend is a very simple metric to calculate. A business can measure its Return-on-Ad Spend by multiplying its sales percentage by the percentage of advertising spend it has. However, the formula needs to be adjusted to match the advertisement spend of the different sites. So if a website has 50% of its advertisement spend as income from advertising, the return-on-advertising spend will be 10%.

Advertising Spend (in 000s) – Marketing Expense (in 000s) – Total Advertising Spend (in 000s)

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Raek Content Team

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