Last Updated on December 16, 2024 by Damien Hurwitz
What is ROAS? When launching an ad campaign, many questions are called to the forefront.
- How much money, exactly, do we want to spend on this advertising blitz?
- What conversion rate are we targeting, and how much are we willing to spend per conversion?
- In terms of revenue resulting from this campaign, what are our goals (and projections)?
In the end, perhaps the most important metric to consider when focusing on a particular marketing or advertising project is ROAS — return on ad spend.
Why ROAS Is So Important in the World of Sales and Marketing
The reason ROAS is so vital to any sales or marketing campaign is that it is both a simple statistic to calculate — in fact, you can generally calculate your ROAS in seconds — but also that it reflects a representative snapshot of how well your ad money is being put to work in real time.
In terms of how to calculate your ROAS, Indeed’s editorial team laid this out in simplest terms:
“ROAS = revenue from ad campaign / cost of ad campaign… The result of using this formula provides a ratio, but it’s possible to multiply the result by 100 to convert it into a percentage. For example, a company that spends $5,000 on an advertising campaign but earns $20,000 in revenue has a ROAS of 4:1 or $4… By multiplying this by 100, the company can determine that the ROAS is 400%.”
It Represents How Effective Your Ad Campaigns Are in Terms of Providing Real Value
Nobody would stay in business for very long if they were freely spending money with no real aim, hemorrhaging cash while driving the bottom line deep into the red.
After all, business is ultimately about profits — very few, if any, entrepreneurs put their heart, pocketbook and sweat equity into a passion project without wanting to see it bloom into a successful business. The metric of success in private enterprise, of course, is whether or not you’re making money… and how much.
Why ROAS Can Be Compared To CPA (and More Broadly, ROI)
ROAS, CPA, and ROI: That’s a lot of acronyms to consider.
CPA, or cost per acquisition (or conversion) reflects the total number of conversions driven by a particular ad buy versus the total budget. To give one scenario, let’s say that a pizza shop spent $100 on targeted advertisements and ended up driving 5 sales as a direct result, making $50 in revenue. In this case, the pizza shop’s campaign has a CPA of $20.
While CPA can be useful as a big-picture tool to determine how much it’s costing you to attract customers with a particular campaign, applying ROAS to the above situation immediately exposes a few problems. The pizza shop may have captured 5 sales, those sales only generated $50 in revenue against a $100 ad spend. Therefor, the ROAS calculation comes in at a less than desirable 0.5.
Advertising consultant Kyle Taylor of Wordstream underscored the importance of ROAS (and relative weakness of CPA) from this perspective, writing:
“While [CPA is] very useful for measuring volume of conversions, it only measures the average cost associated with any one, single action… Achieving a ROAS of less than one is a losing effort, as you’re earning less than $1 for every $1 spent. The ROAS of 3.0 is showing that for every $1 we spent on ads in that ad group, we earned $3 back from that conversion.”
“In a profit-focused strategy, the goal is to achieve as high of a ROAS as possible. Profit margin will differ by industry, but common benchmarks fall between a 3.0 to 4.0 ROAS, so our goal is to meet and exceed these benchmarks,” Taylor concluded.
But what about that old business school standby, ROI?
ROI, or return on investment, can be a great stat to pair with ROAS for a few reasons. Indeed’s editorial team made the case for this pairing:
“ROAS and ROI are both useful metrics for making important business decisions, but since ROAS only evaluates marketing expenditures, companies often compare it to ROI to gain a better understanding of their overall profitability,” they wrote.
“For example, an ad campaign may have a high conversion rate, but if the cost of each conversion is also high, the company may experience a loss in profits. Using ROI in addition to ROAS can provide companies with a more in-depth analysis by factoring in other expenses, like conversion costs.”
Comparing and contrasting ROAS, ROI, and CPA can result in a comprehensive portrait of your current marketing layout, highlighting both successes and failures. Even if you’re taking a loss on a certain campaign, by digging deeper into the numbers you may be able to salvage at least some value — particularly in the form of what to do differently next time — from the experience.
Simple Tips on How To Improve Your ROAS Numbers
To close out this discussion on ROAS and associated territory, it could be valuable to consider a few simple tips as to how one might improve your ROAS figures.
According to Improvado ecommerce expert Bhujal Patel, would-be ad buyers should think about the following before splashing out on a campaign.
- See what your competitors are doing on ad buys: “Use a tool like SimilarWeb to find out which ad networks your competitors are using. Even though SimilarWeb is not 100% accurate, it is a good starting point… Pick a successful competitor — these guys are not experimenting on ads. They’re probably making bank from their campaigns,” Patel suggested.
- Ad size matters as devices vary: “There are thousands of device models. Desktop, laptop, tablet, mobile devices — you name it. Each device displays an app or browser differently. If your ad is displayed inaccurately, the audience will not respond positively… Each platform has ideal sizes for images and videos. For example, Facebook has a page dedicated to its ideal ad sizes. The same thing goes for Google. You can then use a free tool to edit images online,” Patel wrote.
- Cut down on cart abandonment via CRO: Conversion rate optimization (CRO) can mean the difference between a successful sale and an abandoned cart, Patel argued. “One thing you can do is reduce your cart abandonment. Users will typically add products to their cart out of impulse, and then leave your website without completing the purchase. It is a lost opportunity, but you can fix it… Here are some tips on how to reduce cart abandonment: Be transparent on the purchase costs like shipping and handling; Make the checkout process easy and short; Add a thumbnail of the products on the checkout; and add several payment methods.”