Return on Ad Spend (ROAS) Definition - How to Calculate ROAS?

Return on Ad Spend Definition

To focus on the definition, the return on advertising spending (ROAS) is a marketing formula that measures the effectiveness of an advertising campaign.

ROAS indicates the performance of the marketing methods and advertising. Therefore, if the ROAS is higher, it is better.

Why is ROAS Important?

Because firstly, ROAS helps online businesses decide which methods work and how they can improve for the future while working on the advertisements. ROAS is therefore about the costs of advertising.

Campaigns conducted starts with a critical budget, and the results taken from them should mean to the businesses. If the practices fail, then the alternative campaigns or parallel campaigns should be conducted to support the efficacy of the process.

Also, ROAS gives the necessary metrics and insights when it comes to the most influential ad campaign and follows it.

ROAS formula

Taking the ROAS formula into account, you should divide the campaign revenue by the cost of the campaign which is the money you spend on ads.

To exemplify, as Business P you put $ 5000 as revenue for the campaign you conduct, and the total costs you spend on the campaign is $1000.

So, when you calculate: $5000 ÷ $1000 = 5:1 (5 ROAS)

It is straightforward to calculate the problem if you have the numbers of your spends. Therefore, you can get immediate insights by calculating the ROAS.

What is a Good ROAS?

A good ROAS is determined based on the endeavors and the metrics of the companies.

Since there are some criteria that affect ROAS, it is important to take them into consideration while deciding whether the ROAS is good or not.

That is to say, while a company can take 4 ROAS as good, another one still finds it insufficient.

There is no doubt that if a company’s conversion rate and the customer lifetime value is high, the possibility of having a good ROAS can increase as well.

According to the general calculations, the 4:1 is accepted as the middle, smaller than 3:1 means things do not go well, and the greater rates than 5:1 are you are going very well with the process.

How to Improve ROAS

About the ways to improve ROAS, some advices could be given, like:

You should not add irrelevant costs other than the advertising costs
You should prepare your landing page properly so that you can increase conversion rate at first interactions.
Be creative to keep your customers’ attention rather than making them tired more. (A/B Testings and some new activities may encourage the visitors.)
Be careful to determine the average order value for your products; do not underrate them or do not overrate them.
Geo-location and ad targeting are highly important, so don’t miss them to consider.

What is the Difference between ROAS and ROI?

ROI stands for the return on investment, and it is a metric evaluating the performance of an investment.

Since both ROAS and ROI evaluate some performance metrics, the difference between should be highlighted.

To comprehend the difference between them is important; however, it is more critical to lead them together because they separately mean and appeal to different evaluation of marketing work.