Return on Ad Spend 101
Return on ad spend (ROAS) is a marketing metric that tells you how much revenue you make for each $1 you spend on an advertising campaign. The goal is to make more than you spend, resulting in a positive ROAS. You can calculate your return on ad spend across your entire marketing budget or break it down to find the ROAS of specific ads, campaigns, and more.
Why is it Important to Know Return on Ad Spend?
Knowing how much you spend on an advertising campaign vs how much you make from the campaign is crucial because it tells you whether or not your time, money, and efforts are paying off. You can also use ROAS metrics to improve your campaigns, resulting in a higher return on your ad spend in the future.
How to Calculate Return on Ad Spend?
Calculating your ROAS is a relatively simple equation:
ROAS = the revenue attributed to an ad campaign / the cost of running the ad campaign
or example, say you create a social media ad campaign for your newest product, which costs $10. You spend $300 to promote your ad on Instagram and Facebook to a targeted audience over one month. After two weeks, your ad brings in a total of 60 sales or $600 of revenue. To calculate your return on ad spend, divide 600 by 300. The result is 2. This positive result means you made more money than you spent, so the campaign is considered a success.
Now, this equation doesn’t factor in the cost of paying the employee(s) who created the social media ad campaign or the cost of the product distribution. So, for a more complete picture of the overall cost of a specific campaign, you can use the same equation and factor in additional expenses into the amount of money invested.
For a quick and easy way to find out the cost of various kinds of ads and determine your return on ad spend, use AdRoll’s ROAS calculator.
How to Use Return on Ad Spend Metrics to Increase Future ROAS?
Now that you know how to calculate ROAS, the next step is to understand how to use the information gathered to benefit your business. For example, by calculating your return on ad spend across your entire marketing budget, you can determine how much advertising contributes to your bottom line or your net income.
For more specific ad campaigns, you can calculate your return on ad spend to track, measure, and analyze how your campaign is performing and if it’s worth the money. For example, if an advertising campaign does not result in a positive ROAS, it’s considered ineffective. In this case, you can use the ROAS insights to adjust your campaign or switch gears altogether. On the other hand, if a campaign results in a positive ROAS, you can analyze the results and mimic the strategy across future campaigns to see more positive results.
How to Prepare Your Ad Campaign for a Positive ROAS?
The first way you can prepare your campaign to result in a positive return on ad spend is to analyze past campaigns to see what worked and what didn’t. Using this information, you can set your campaign up for greater success from the beginning.
Next, determine a minimum ROAS for your campaign. This will be your target return on ad spend, which will help you determine whether or not your campaign was successful. The general rule for an acceptable ROAS is 4:1. This means for every $1 spent on advertising, you generate $4 in revenue. However, a “good” ROAS might look different for you depending on your budget, goals, and additional operating expenses.
Lastly, you can set up an A/B test for your campaign in an effort to see a high ROAS. To do this, come up with two versions of your campaign and promote them side-by-side for a period of time. After that period of time, whichever version of the campaign results in a higher ROAS is the version that continues for the remainder of the campaign.
Limitations of Return on Ad Spend and How to Adjust
A positive ROAS doesn’t always mean you will make money. As mentioned above, calculating your return on ad spend doesn’t factor in additional costs such as employee labor, product costs, unexpectedly high production or shipping costs, and more. Moreover, there may be instances where a browser sees your ad campaign but doesn’t click directly on the ad to purchase the product. Instead, they visit your website via a different route to make their purchase inspired by your ad. In this case, this purchase is not included in your ad metrics or your ROAS calculation. Because of these limitations, it is important to use the ROAS metric alongside other marketing metrics to ensure you have a complete picture of the success of your marketing efforts.