ROAS is one of the most fundamental metrics for online advertisers today. But before the digital world, ROI was the more common metric – which measured the profit generated by ads relative to their cost. Today, in our digital age, ROAS is the more important metric for advertisers.
ROAS stands for return on ad spend – a marketing metric that measures the amount of revenue earned for every dollar spent on advertising.
In other words, ROAS measures the financial effectiveness of your advertising campaigns. The more effectively that your messaging can connect with your prospects, the higher the ROAS and the higher the revenue generated.
To calculate ROAS, you divide the revenue generated from your advertising campaign by the associated cost of running the campaign.
The equation looks like this: Revenue/ Cost = Return on Ad Spend.
Let’s take a look at an example: You spend $1000 on an ad campaign, and it generates $4000, therefore, your Return on Ad Spend would be: $4000 divided by $1000 equaling 400% or a 4:1 ratio.
ROAS can be represented in dollar or percentage form, but a ratio of revenue to ad spend is the most common (ie: 4:1).
If you are measuring ROAS as a percentage the equation would be Revenue/Cost X 100 – which gives you $4000/$1000 X 100 equalling 400%.
As a dollar amount, it is simply just one less step – Revenue/Cost. This gives you: $4000/$1000 which equals 4.
In this example, your ROAS is 4:1, therefore, for each dollar you spend on advertising, you receive $4 in revenue.
Its as simple as that!
So why not just use conversion rates or click-through rates as a metric to track the success of your advertising campaigns? Because conversion rates and click-through rates do not track the amount of revenue generated through the success of your advertising campaigns. This is where ROAS comes into play.
Without ROAS, you are simply not able to track where your campaigns are going right and where they are going wrong. Without having revenue and cost values as part of your ad performance assessment and decision making process, you could end up making poor decisions with your campaign adjustments. Additionally, the goal of advertising is to make money, and with that, you want to know how to make the best informed changes.
According to a study by Nielsen, the average ROAS across all industries is 2.87:1. This means that for every dollar spent on advertising, the company will make $2.87. In e-commerce, that average ratio goes up to 4:1.
This also depends on the stage and financial health of a company. Generally, start-ups require higher margins, whereas established companies who are more committed to growth can afford higher advertising costs. Companies with higher margins can survive with a low ROAS, whereas a company with smaller margins has to maintain low advertising costs.
Overall, how every company utilizes ROAS is different. The biggest win with ROAS calculation is knowing where and how to spend your advertising money wisely.