What Is Return On Ad Spend (aka ROAS)?
Return on ad spend (ROAS) is a metric used to measure the effectiveness of an advertising campaign. It is calculated by dividing the revenue generated by the campaign by the amount of money spent on advertising. For example, if a campaign generated $100 in revenue and cost $50 to run, the ROAS would be 2, meaning that for every dollar spent on advertising, two dollars were generated in revenue.
ROAS is an important metric for businesses to track because it allows them to see how much revenue their advertising efforts are generating and make decisions about where to allocate their advertising budget. By comparing the ROAS of different campaigns or ad formats, businesses can identify which ones are the most effective and focus their advertising efforts on those.
Does ROAS Tell The Whole Story?
Calculating ROAS is straightforward, but it’s important to keep in mind that it only tells part of the story. It’s important to consider other factors, such as:
- the overall profitability of the products or services being advertised
- the lifetime value of a customer
- the overall goals of the advertising campaign
Can You Control ROAS?
One way to use ROAS to improve the effectiveness of advertising campaigns is to set target ROAS levels for each campaign. For example, a business might set a target ROAS of 4 for a campaign, which means that for every dollar spent on advertising, they want to generate at least four dollars in revenue. This target can then be used to guide the optimization of the campaign, such as by adjusting the targeting or ad creative to improve performance. It is equally important to watch other metrics, such as click-through rate, frequency an ad is shows to a potential customer and quality rankings on certain platforms. While setting ROAS targets is a good way to set your business up for success, it can also limit the amount of money spent and hinder your ability to scale (aka spend more profitably).
Another way to use ROAS is to compare the performance of different advertising channels or formats. For example, a business might find that their Facebook ads have a higher ROAS than their Google ads, which could indicate that they should focus more of their advertising budget on Facebook. This sounds easy, but there are lots of factors to take into consideration before making decisions like these, including profitability, gross vs net profit, and what your customers actually want.
In conclusion, ROAS is a useful metric for measuring the effectiveness of advertising campaigns and can be used to make decisions about where to allocate advertising budgets and how to optimize campaigns, but it is only one piece of the puzzle. By setting target ROAS levels and comparing the performance of different advertising channels and formats, businesses can improve the return on their advertising spend and generate more revenue from their advertising efforts. A better way to look at measuring how your campaigns are performing might be to consider MER, or marketing efficiency ration, which we will cover in another post.
