Return on Ad Spend (ROAS)

Once upon a time, advertisers made TV spots, aired them, got audience numbers and . . . guesstimated the ad’s impact on driving actions or sales. Digital marketing and its ability to collect data on just about every consumer action turned that guessing game into a measuring game. Today, marketers can evaluate and optimize performance data including ROI, CTR, CPC, and conversion rate. And just when you thought all that was enough, we’re here to tell you that it’s not.

While ROI does provide insight into how well a campaign has performed, it tends to be too broad. Click-through rates inform how many people clicked an ad, but not how many people have made a purchase. Conversions can potentially lead to profit, but what if the intended action is to download or subscribe to an email distribution list? Individually, these metrics don’t tell us much, together they help provide some clarity, but if you are looking to get the full picture, ROAS (Return on Ad Spend) is a must-have metric.

So, what is ROAS? How do you track it? Why does it matter? And most importantly: Can you improve it?

Advertising is an investment, and it's important to understand if your investment is yielding any profit. ROAS, Return on Ad Spend, measures how effectively you are investing your marketing dollars. ROAS is measured as a ratio, so, for example, if your ROAS is 3:1, you’re generating $3 in revenue for every $1 spent on advertising.

Tracking ROAS

Tracking ROAS requires a bit of prep work. You have to be sure that your conversion tracking is set up correctly to simultaneously record the value of each sale. Knowing where your users are coming from, how they interact with your ads, and how they behave after is crucial. This is not always a simple feat, but tracking your conversions, and connecting them to key actions in their journey toward becoming a customer will help you understand where and how to spend your advertising dollars.

Keep in mind that in order to be successful, you need to know your breakeven point as well. This means you also need to know how much revenue you’ve generated, the cost of goods sold, any fees associated with your sale, and your profit per sale. All of these metrics will provide you with a sense of what the minimum requirements are for your campaign to be considered successful. Remember, if your data isn't accurate, your findings won't be either.

Why does it matter?

Although it may seem an extra step on top of the dozen other metrics you are likely tracking, there is good reason to track and measure ROAS. Marketing, especially advertising, in essence is a tool to drive sales, not just achieve your target goals of clicks or driving traffic. Although those are great metrics to achieve, your goal ultimately is to make money.

ROAS helps you understand what is working and what isn’t when it comes to your advertising strategy. This deeper insight allows you to make better decisions that will hopefully further drive revenue.

How to calculate ROAS

Calculating ROAS for a campaign is straightforward—you simply divide the revenue generated by the cost of the campaign. For example, if your campaign has generated $1,000 in revenue, and you have spent $100 in advertising, your ROAS is 10:1. For every dollar spent on this campaign, you generated $10 in revenue.

How is ROAS different from ROI?

If you find yourself thinking ROAS seems familiar, it's because it's very similar to how you may be calculating overall ROI. There is a key difference, however. When calculating ROI, you are looking at whether an entire project was successful. This can be impacted by multiple factors such as cost of goods sold. ROAS is more granular, focusing on advertising costs specifically—this is a much more effective metric when considering how and where to spend your advertising dollars.

Costs to consider when calculating ROAS

While the formula to calculate ROAS may seem simple, tracking the costs associated with the ad may not be so. So, what costs should you be considering when calculating an accurate ROAS? The first cost is your actual ad spend. But do not forget to include the less obvious expenidtures such as:

Partners / Vendors
- Be sure to accurately determine any fees, costs, or commissions associated with partners or vendors that assist in your campaign.
Costs of Labor
- The cost associated with any in-house resources and personnel that play a role in executing your advertising efforts. This can include copywriters, graphic designers, and media planners and buyers.
Tools
- Don’t forget to account for specific platforms, software, or tools utilized in order to launch your campaign.

Taking the time to account for all these costs is crucial to calculating an accurate ROAS.

The results could surprise you by revealing that a campaign you thought was working isn’t, or that one you weren’t betting on was driving big returns. Remember, if your data isn't accurate, your findings won't be either.

So if ROAS is so great, should you consider it the ‘end-all-be-all’ metric when measuring campaign performance? Well let’s take a deeper look at ROAS in comparison to other metrics.

ROAS vs. Click-through rate (CTR)
- On its own, CTR is not necessarily as powerful as it seems on the surface. Simply understanding how many people click on your ad does not tell you whether or not you’ve generated any revenue. However, pairing ROAS with click-through rate can provide a much deeper understanding of your campaign. For example, if you’ve generated 1,000 clicks, but your ROAS for the campaign is 2:1, this tells you that users are interested in your ad, however, they are not converting. This should trigger you to review and question certain elements of your campaign, including your targeting tactics or your conversion path.
ROAS vs. Conversion rate
- You shouldn’t necessarily track conversions over ROAS or vice versa, as these two metrics are telling you two different things. Conversion rate measures user actions, not dollars generated. Think of it this way: if your conversion path is directed toward generating email sign ups or downloading a piece of content, what does that mean in terms of dollars? ROAS measures revenue generated, not just conversions. For this reason, in order to get the full picture, you should measure both!
ROAS vs. Cost per action (CPA)
- CPA tracks your average cost per conversion. This is a great metric to understand your baseline costs for all conversions. However, CPA does not tell the complete story, as not all conversions are equal. To understand this, consider two different ads each costing $100 and leading to a conversion, ad A yields a customer that spends $5, and ad B yields a customer that spends $500. Clearly ad B was much more effective. This is where ROAS comes in, by considering revenue generation you can now focus on what happens after a conversion.

Any metric on its own can’t provide the full picture on your advertising efforts. ROAS needs to be considered alongside your other metrics to help understand what is working, and if things are not working to help narrow down where in your conversion path you should focus.

What is a good benchmark for ROAS?

Like many of the metrics you are currently monitoring for your campaigns, there is no definitive ‘good’ or ‘bad’ ROAS. ROAS can vary across campaigns, industries, or even your individual goals, however, if you are looking for a general target benchmark, a ROAS of 4:1 is often a good indicator of a successful campaign.

Here's a good rule of thumb to follow:

A ROAS of 3:1 or below is cause for alarm and you should review your campaign, landing page, targeting, and costs.
A ROAS of 4:1 is a good indicator of campaign success.
A ROAS of 5:1 or above likely means you are generating profit!

My ROAS is low...What am I doing wrong?

There may be times where your ROAS seems low, but this does not necessarily call for panic. Your first step should always be to review your costs, and ensure that you are capturing them accurately. Once done, if you have made any changes to your costs, recalculate your ROAS before making any decisions on next steps.

In certain circumstances, a ‘low’ ROAS may even be ok. For example:

New Brand
- If you are working on launching a new brand, a low ROAS is not necessarily a cause for concern. Keep in mind that your brand will require time to gain traction. The goal here is to see continued improvements over time.
New Market
- Similar to launching a new brand, if you are targeting a new market you may end up with a low ROAS. Again, monitor this over time with the goal being to see improvement as you gain traction.
Campaign Goals
- Keep your campaign goals in mind when evaluating your ROAS. For example, if the primary KPI of your campaign is brand awareness, a low ROAS should be expected and is not fully indicative of performance.

Now that we’ve discussed potential times when a low ROAS is ok, here are steps you can take to improve your ROAS.

Review your attribution model
- There are many attribution models when it comes to advertising—first touch, last touch, and multi-touch. The default model is often “last click” attribution. However, this may not necessarily be right for your campaign. First or last click models can impact ROAS and even make successful campaigns seem like they are underperforming.
Review your campaign
- A vital step, but often overlooked is to review your campaign. Ensure that your ad is on brand and captures users’ attention. Review your landing page, ensure that it offers a friendly user experience and is easy to navigate. You want to make purchasing your product, or contacting your team to be fast, reliable, and easy.
Lower your cost of advertising
- What this looks like will vary depending on your business, but considering that the cost of advertising largely contributes to your ROAS, this is a great place to look. Reducing your cost of advertising can come in a few forms. To start, can you reduce the time spent on ad management? Another potential cost-savings involves reviewing your targeting to ensure that you are not wasting any money on the wrong audience. You’d be surprised how much you can save by narrowing down your targeting to ensure you are only reaching those that are most likely to engage.
Improve your revenue
- If, for whatever reason, you cannot reduce the cost of your ads, improving the revenue you are generating can boost your ROAS. Be sure to monitor ROAS alongside your other key metrics. For example if you have a high CTR but a low ROAS, you may have an issue with your landing page or conversion path. By improving your conversions you can potentially increase the revenue you’re generating and improve ROAS.

Data. It’s a double edged sword for digital marketers with nearly everything being trackable/measurable. Data is great when it comes to measuring and evaluating the success of marketing efforts—click-through rate, cost per click, conversion rate, ROI, attribution. However, the ability to track all these actions can often keep marketers from seeing the bigger picture when determining a campaign’s success. You can’t see the forest for the trees.

There is value in raising awareness, which is not always measurable. Think of the billboards, videos and, of course, the Super Bowl ads, that stick with you because they made you laugh. Those LOL moments and the actions they inspire down the road can be as valuable to measuring ad effectiveness as CTRs, ROIs and ROASs.