If you work in business, you know—a company is as successful as its marketing department. Your product or service could be amazing, but if it doesn’t reach the right customers, it won’t realize its full potential. Once you know your target audience, you develop a marketing plan and an advertising strategy which most likely includes a few paid ads. Here is where ROAS comes in.
What is ROAS?
In short, ROAS is the acronym for “return on ad spend,” a digital marketing metric. Think of it as an indicator of how successful your paid advertising campaign is, measuring how much you profit from such an investment. Needless to say, this is an essential tool, so let’s take a step-by-step look at how to calculate ROAS.
How to calculate Return on Ad Spend
The ROAS calculation looks like this:
ROAS = (Ad Revenue % Ad Spend) x 100%
Let’s break it down using an example.
Say your ad spend, the monthly budget allocation for your ads, is $100. In one particular month, your ad revenue is $200. By dividing these numbers, we get 2, which we then transform into a percentage: 200%. This means the return on your investment is 200%: for every dollar you spend, you get two in return. As you can see, converting ROAS into percentages makes its interpretation easier.
It’s important to point out you won’t always get such clean numbers. For your $100 of ad spend, you may get a $141.5 revenue, which amounts to 142%. That is still a profit, but less round of a percentage—which leads us to the next question.
What ROAS is considered good?
The obvious answer is, the more return on ad spend you get, the better. Given the diversity of not only products and services, but of the advertising budgets that are out there, establishing hard numbers as good or bad is difficult. In terms of ratio, it is generally accepted that for every dollar you spend, you should earn four dollars in return. However, if you want to improve your numbers by working with what you have, there is a solution for that, too. Calculate the point where your ROAS breaks even, then evaluate the success of your campaign based on how far above that point your ROAS reaches. While it might sound complicated, it isn’t—just follow the steps below.
Calculating break-even ROAS
- Establish the numbers
First, you need the sale price. Say your company sold shirts, one of which retails for $35—that is your sale price. Then, look at the cost of goods, which includes production expenses, such as materials and labor force, excluding indirect ones, such as overhead costs. For our example, let’s say the cost of goods is $10.
- Identify the profit
All you must do here is subtract the cost of goods from the sale price. If making a shirt costs $10 and you sell it for $35, then your profit is $25.
- Calculate the profit margin
How much of what you are selling turns into profit? The profit margin will answer that question and, as you might expect, it is a percentage. To figure it out, divide your profit by the sale price, then multiply the result by 100. If we consider our previous example with the shirts, the calculation looks like this:
25 % 35 = 0.71
0.71 x 100 = 71%
- Get your break-even ROAS
For this final step, divide 1 by your profit margin (the number).
1 / 0.71 = 1.41
Now that we have our break-even ROAS, we can refer back to our digital advertising campaigns. Any result above that number is a profit, while those that don’t make the cut are losses. Of course, you cannot improve your campaigns just by knowing how successful they are, but this piece of information is invaluable when deciding what to focus on next.
Calculating the break-even point is helpful outside of ROAS, too. Maybe you have a start-up company, want to introduce a new product, or think of making a special sale. Finding out the break-even point will help you, and you can see how to do just that through this article.
ROAS and ROI – what is the difference?
When it comes to ROAS, you already know the meaning, but chances are you came across ROI, too. Also a marketing metric, ROI stands for return on investment—so, not just ad spend. The easiest way to differentiate between them is to think of ROAS as the particular and of ROI as the general or, if you will, the bigger picture. Unlike ROAS, ROI takes into consideration business costs such as overhead or shipping expenses when calculating profit. Both metrics are important, and even more so is understanding their specificity.No tool can make or break your business goals, but the more you learn, the better you’ll be able to use them to your advantage. If you want to know more about how to get sales and marketing to work together, this article is worth checking out next.
