ROAS, or return on ad spend, is expressed in dollar amounts or any other currency and refers to how much your company earns for every dollar spent in an advertising campaign. It's one of the key performance indicators used to measure the effectiveness of an ad campaign besides other factors such as click-through rate (CTR) and cost per acquisition.
Importance of Knowing ROAS
It helps determine campaign results and set ad spend.
Your ROAS will allow you to know whether the ads are worth the money and effort you poured into them.
If you earned revenues from the ad, you may decide to continue or renew the campaign. But if not, you can end it quickly and review your strategy so you can direct your ad budget where you can generate higher revenue.
If you run several ads, the ROAS of each will help determine the best-performing type of ad so you can adjust your campaign accordingly. The ROAS can also serve as a benchmark for planning future ad budgets.
It lets you compare ad performance with other marketing strategies.
You can use the ROAS to calculate the total revenue you get from all ads under one marketing strategy in comparison with the others, which may include rewards and referral programs, working with influencers, or discount and promo codes.
But if you want to review the overall performance of your website or each of your social channels, the return on investment (ROI) is a better metric to use. The ROI considers the profits relative to the cost of all marketing programs—not just your ad spend—and how they contribute to the company's bottom line.
How to Calculate Your ROAS
Your ROAS is the ratio of the amount your business earned from the ad campaign to the cost of that campaign. The formula is: revenue ÷ cost = ROAS. Under cost, you should factor in the fees you pay your ad agency or the salary of your in-house staff running the ad campaign. The percentage of commissions paid to affiliates is also part of the cost.
For example, you spend $1,500 on Google Ads monthly and earn an average of $5,000 monthly from clicked ads. Your ROAS is $5,000/$1,500 or $3.33 for every $1 spent.
How ROAS Is Related to CTR and CPA
The CTR is the percentage of users who clicked your ad out of the total number of impressions or views of the page where the ad appears. It's a good indicator of the level of engagement you're getting from users. But CTRs alone can't tell you if users who clicked your ads resulted in sales. Thus, you also need to know the ROAS to have a better picture of your ad's performance.
If instead of measuring the return on your marketing spend you need to gauge the real expense of turning a lead into a paying customer, cost per acquisition (CPA) is the metric to use. You divide the total ad costs by the number of conversions to get this figure.
Although marketers in general set 4:1 or $4 in revenue or higher for every $1 spent as the ideal ROAS, one's campaign goal, your business type, and profit margin can influence this ratio.
For instance, your ROAS will tend to be higher if your aim is to boost sales compared to building a social following or brand awareness. Also, a clothing brand may need a higher ROAS compared to a distributor of high-dollar medical instruments devices.
Ways to Improve Your ROAS
Check your attribution model.
When tracking ROAS in social media or marketing software, you need to select your attribution model (first- or last-touch, linear, etc.). Marketing attribution is a way of determining which interaction or ad influenced a customer to buy your product. Marketers recommend picking one model and using it consistently for comparing ROAS under one campaign or channel.
Review and enhance your landing page.
Make sure your landing page has a clear call to action, headline, appropriate layout, images, and content length. It should also load fast and display well on mobile devices.
Include "negative words."
For Google Ads, list all the keywords that don't lead to conversions and copy-paste them in your "negative keywords list." If your business makes customized wooden cabinets, you may have to include the words "plastic" or "steel" in your negative word list so your ad won't appear when people search for cabinets with metal or plastic frames.
Be more selective about the ads you buy.
You may need to partner with a marketing specialist or agency to audit your ad account to know which type of ads to best bid for, the right channels to launch them, and when to run them.