ROAS, meaning Return On Ad Spend, is a measure of how much revenue your business generates per dollar spent in advertising. It is therefore a metric quantifying the return on investment in advertising. In this article, we will examine what is ROAS, how you can calculate it and why it is so important.
ROAS is quite similar to (and sometimes confused with) another metric: Return On Investment (ROI). Except, to put it simply, ROAS means the ROI for advertising specifically; so, in this case, the money you’re spending on digital advertising is the investment on which you’re tracking returns.
That being said, ROAS is the component of ROI that is more important to advertisers and marketers in determining 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 into it). For instance, a key difference between the two metrics might be evidenced by the following situation: a negative ROI remaining a positive ROAS, because the overall investment might be higher than the profit generated, but relative to the investment in the advertising campaigns themselves (depending on how you calculate it), the ROAS itself can remain positive.
You should not oppose the two metrics, as they complete each other (and one is literally a part of the other), but while ROI serves to give visibility over long-term profitability, the ROAS marketing metric is much more efficient for optimizing short-term or specific marketing strategies.
While the Return on Ad Spend formula itself boils down to just two numbers (total advertising costs and total revenue generated by advertising), you first need to make sure both of these are as accurate as possible.
For instance, you might want to either track the flat dollar amount spent on a specific platform, or include not just your direct advertising costs, but also indirect costs, like money you spent on outside contractors who assisted with advertising content creation or ad placement. Affiliate marketing costs are another example of an indirect cost that should be factored into total ad spend: for instance, vendor costs (who will most likely take commission fees for running your ad campaign) or team costs (if you need to pay people to set-up and manage the campaigns, whether internally or through an agency) can “run up your tab” quite quickly.
What’s more, when you factor in how you calculate the revenue attributable to ads, it can become quite a subjective metric. It will, however, always say something important: it will then be up to you to get the most from that metric.
That is why you need to take particular care when defining your numbers before inputting them into your ROAS formula; and that definition will depend on the type of campaign you are running.
But ultimately, the ROAS formula is always the following:
Return on Ad Spend is especially important when your business has scaled to a point you need to track multiple campaigns, channels and ad platforms. That is when you need to monitor their effectiveness separately to budget accordingly. Logically, you may want to calculate ROAS on your overall ad spend, and then calculate by channel, campaign, and platform to determine your best performing channels, or where most of your profit is likely to come from.
Likewise, you definitely need to accurately assess the timeline associated with ad spend and the resulting revenue. It usually takes some time for advertising to generate leads. For instance, it takes Google’s ad platform up to a week just to determine where best to display a new ad. And once you have a lead, it could take months to complete the sales cycle and turn that lead into a paying customer.
These delays are the reason you should spread your ROAS calculations out over time, such as once per quarter. Because calculating ROAS over time frames that are too short, like every week or month, make you run the risk of failing to properly understand the association between ad spend during the time frame and resulting revenue.
You may also want to calculate what the minimum acceptable ROAS is to you before spending on any campaign. Just like when calculating ROAS itself however, that number is going to be subjective; you will need to make that call according to both your financial situation and your current goals. Be sure however to remain flexible when it comes to your marketing budget, and don’t remain dead set on certain numbers, as you remember those figures were subjectively decided in a specific context (that might evolve).
Like most other metrics in marketing, ROAS is a KPI that can be combined with a variety of other key performance indicators to gain deeper insights. So do not hesitate to cross-reference ROAS with CPC (Cost Per Click), CPA (Cost Per Acquisition) or CPL (Cost Per Lead), especially in the context of mobile marketing, to help gain a better understanding of your advertising strategy’s effects and determine its impact on your selected targets.
Ultimately, ROAS is used to reach a few, highly important goals:
Knowing your ROAS means knowing which advertising channels, content types, and strategies are working best. And this knowledge will help you improve your advertising campaigns’ impact over time.
Calculating ROAS enables you to identify advertising initiatives that are not delivering the expected results, which in turn helps you eliminate underperforming advertising investments, thereby reducing your overall advertising costs while achieving the same results.
Calculating ROAS regularly and accurately helps you budget for future advertising costs, as it indicates how much you need to spend on advertising to obtain the required results. This means advertising can become a fixed part of your budget, rather than an expense you need to conjecture about from month to month or quarter to quarter.
Knowing your ROAS enables you to determine what percentage of your overall sales comes from advertising, and what percentage is generated by other means, such as retaining customers who have already converted. This information is useful in determining the proportion of overall sales to be invested in advertising versus other marketing strategies, such as customer loyalty programs.
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