Profitable advertising is at the heart of a successful business. This is why it’s important to be familiar with advertising metrics. In this article, we look at what ROAS is, how to calculate it and interpret the numbers, and why ROAS matters to every business owner.
What is ROAS?
ROAS stands for Return on Ad Spend. This is an important business metric to assess ad-generated revenue against advertising costs. In other words, ROAS tells you if your advertising strategy is cost-effective.
To be clear, when we mention advertising in this article, we mean digital advertising.
How is ROAS calculated?
To find out your advertising ROAS, you will need two figures:
- First, your campaign conversion value is the revenue generated by ad conversions.
- Your campaign advertising costs.
Where do you get your conversion value from? This depends on the platform you’re using. But irrespective of which platform you use, you’ll have to set it up manually. Here’s how to do that in Google Ads and Facebook Ads, which are the most common paid ad platforms:
Once you’ve done that, you can use the following formula to get your ROAS:
Total Ad Revenue/ Total Ad Spend
For example, your campaign ads generated total revenue of $5,000, and you spent $2,500 to get the campaign going. In this case:
5,000 / 2,500 = 2
This can be expressed as a ratio of 2:1 (we’ll look at this in detail in the following section)
If you prefer to calculate ROAS as a percentage, multiply the number you got by 100. This is the formula:
Total Ad Revenue/ Total Ad Spend x 100
So, using the example above:
5,000 / 2,500 = 2
2 x 100 = 200, so your ROAS is 200%.
Now let’s look at what these numbers mean.
What numbers should you be aiming for?
Since ROAS is a metric, you’ll want to know if your values are good, average, or below average.
We’ve said that ROAS can be expressed as a percentage or a ratio. For ratios, anything that’s 2:1 or above is a good sign. A 2:1 ratio means that for each dollar you invested in ads, you made $2. A 1:1 ratio means you’re breaking even. Anything under 1:1 means that you’re losing money with your ads. If you use percentages, you aim for 200% or higher.
ROAS is that not all businesses need the same amount of money to be profitable. For example, a 2:1 ROAS can be okay to some, but other companies require a ratio of 8:1 to stay afloat. So, what counts as a good ROAS depends on your business and your industry.
It would be best to remember that ROAS varies across the conversion funnel. For example, if you advertise during the Acquisition stage, you can expect ROAS below. But ads in the Retargeting stage tend to yield higher ROAS because customers already “know” you and are more likely to convert.
The general rule of thumb is the higher, the better.
Why ROAS matters to your business
If you use paid advertising to promote your business, you can’t ignore ROAS. Here are some reasons why:
- ROAS tracks profitability to alert you to unsustainable practices and improve your chances of business success.
- Tracking your ad campaign performance is essential to building a data-driven advertising strategy. We can’t forget that e-commerce has become incredibly competitive. Some sources say that the average consumer is exposed to 10,000 ads per day. So to stand out, you can’t afford to leave your ad strategy to chance.
- On a multi-ad campaign, ROAS can help you determine which is/are the best performing ad/s. Once you know that, you can drop non-profitable ads to ensure your budget and resources are hyper-targeted. The same applies if you’re doing A/B testing on your ads.
- Knowing this metric can help you optimize future ad campaigns. For example, if an ad has performed well, you can use the structure and core features to refine your marketing strategy and reach more people.
ROAS is a crucial metric to track for anyone with an e-commerce business. Knowing your ROAS can help you determine how well your ad campaigns perform. It can also help you make data-driven business decisions and change your ad strategy to ensure it brings you the money you need.
Zoe Dromgoole is the Marketing Executive at Wood Flooring Ireland. The team at WFI uses project milestones for all projects to ensure it runs as smoothly and efficiently as possible. Wood Flooring Ireland sells bespoke engineered wood flooring such as herringbone flooring.
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