Return on Ad Spend (ROAS): What is It & How to Calculate?

How do you measure the success of your digital marketing campaigns? Do you analyze conversion rates, click-through rates, cost per conversion, or your return on investment? While all of these are crucial metrics to measure, you may be missing out on one of the most crucial ones – ROAS, or return on ad spend- a critical metric for assessing the effectiveness of your marketing and advertising effort.

Measuring your ROAS gives you real-time insight into how your campaign revenue compares to costs. Yes, costs per conversion also give you great insights, but ROAS gives you a comprehensive view. 

In the blog, you will get an insight into the following:

  1. What is ROAS, and what is its importance in measuring your marketing effectiveness?
  2. How to calculate ROAS
  3. Return on ad spend formula
  4. Pros and Cons of ROAS in Digital Marketing, and much more.

While this may sound technical and intimidating for some, we promise to break it down into simple, understandable sections. So here goes:

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What is Return on Ads Spend (ROAS) in Digital Marketing?

Return on ad spend is an essential key performance indicator (KPI) in digital marketing in mobile and online marketing. It is a metric measuring the revenue generated for every rupee spent on advertising. It measures the ROI (return on investment) of money invested in digital advertising. Plus, ROAS can be measured more granularly based on certain ads, targeting, campaigns, and so on.

In other words, return on ad spend measures the financial effectiveness of online advertisers. The more efficacious your messaging can connect with your prospects, the higher the ROAS and the higher the revenue generated. Join an online digital marketing course led by an expert team to skyrocket your career.

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Practical Example of Return on Ads Spend Use in Digital Marketing

Let’s look at some practical examples of how return on ad spend is used in digital marketing:

1. Google Ads Campaign

Consider you have invested ₹500 in a Google Ads campaign to promote your online healthcare products store. After a week, you receive ₹1500 in sales attributable to this campaign.

As per the ROAS formula mentioned below, you get an ROAS of 3. Though this value is lower, it is regarded as a good result since for every rupee invested in advertising, you got ₹3 back.

2. Advertising Campaigns on Social Networks

As a fashion company owner, you invested ₹1000 in an ad campaign on Instagram to promote your new clothing collection. After one week, you get ₹5000 in sales directly attributable to this campaign.

As per the ROAS formula mentioned below, you get an ROAS of 5, meaning that for every rupee invested in an ad, you get ₹5 back. This is an excellent result in terms of ROAS.

Also Read: The 5 D’s of Digital Marketing: Comprehensive Guide 2024

3. Email Marketing Campaign

Suppose you launch an email marketing campaign with software that fares ₹200 monthly. From this campaign, you earn ₹1200 in sales.

As per the ROAS formula below, you get a ROAS of 6, which is again a positive result.

How to Calculate Return on Ads Spend (ROAS)?

ROAS in digital marketing is calculated as follows:

ROAS = Revenue attributable to ads / Cost of ads

For instance, if you invest ₹100 into your ad campaign and generate ₹250 in revenue, your ROAS is 2.5.

In case you prefer to express your ROAS in terms of percentage, multiply your result by 100. In the above example, your ROAS would be 250.

If ROAS > 1, you are at least covering your marketing expenses with revenue but are likely losing money after deducting expenses. Generally, a ROAS of 3 or more, which means every  ₹1 spent on advertising generates  ₹3 in revenue, is regarded as good. What constitutes a desirable ROAS varies significantly according to industry, business type size, etc.

Several ways can decide the cost of your ads. You can track the actual amount spent on a specific ad platform, whereas you can include extra advertising costs such as:

Salary Costs

The cost of an in-house or contracted person who manages the ad campaign.

Vendor Costs

This includes fees and commissions from vendors that facilitate the ad campaign.

Affiliate Costs

This includes individual affiliate commissions and any affiliate network fees.

Based on the type of ad campaign you run, it’s helpful to calculate the ROAS depending on ad costs and a separate ROAS that comprises these extra advertising costs to get the more complete picture of the campaign’s profitability.

Difference Between Return on Ads Spend and Return on Investment

While calculating the ROI, you look at measuring the return on investment relative to what the cost of that investment was. It’s a calculation of your net profit and the investment, with a formula:

ROI = (Net profit / Net investment) * 100

ROAS in digital marketing helps advertisers and marketers determine the overall efficiency of mobile or online marketing campaigns by calculating the amount of money earned from a campaign relative to the precise amount invested.

Note that a negative ROI is a positive ROAS because your overall investment might be higher than the profit generated. Still, relative to the investment in the advertising campaigns themselves, the ROAS itself can be positive.

Why does Return on Ads Spend Calculation Matter?

Digital marketing agencies must decide if an advertising campaign is working. Tracking and calculating ROAS is a productive way to recognize areas where you can reduce ad spend and opportunities to double down. 

ROAS is important as it answers whether my mobile or online marketing efforts are working. It also guides decision-making around where to invest more in the budget and where to scale back.

For instance, if you run a campaign that delivers top-quality users generating significant revenue in your app but end up paying more than you gained from those visitors, that campaign can’t be considered a success, and that’s precisely what ROAS helps you determine.

Several methods are used to optimize ROAS in digital marketing. One approach is to run numerous campaigns in parallel, running ROAS calculations for each. The modest-performing campaigns can be dialed back while a bigger budget is provided for the higher-performing campaigns. Insights gained from measuring.

Also Read: Why Choose Digital Marketing as a Career in 2024 (15 Reasons)

What is a Good Return on Ads Spend?

A good ROAS depends on various factors, including your advertising goals. If brand awareness is your objective, ROAS will be low since awareness doesn’t drive immediate conversions.

A good return on ads spend also varies across industries. Some industries require a higher ROAS for the ad spending to be worthwhile. For instance, companies may expect a higher ROAS with lower customer lifetime value (CLV).  More revenue upfront makes up for the fact that less revenue is generated over the consumer’s lifetime.

A standard benchmark for ROAS calculations is 4:1, which means that for every ₹1 you spend, you generate ₹4 in revenue. The appropriate ROAS benchmark varies across industries. Before launching an ad campaign, decide on a target ROAS suitable to your business and industry. If you want to learn more about digital marketing strategies, enroll in a digital marketing course and boost your website’s performance.

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Pros and Cons of Using ROAS in Digital Marketing

ROAS is a valuable metric, but isn’t perfect. Let’s closely analyze the advantages and disadvantages.

Advantages of Using ROAS

1. Select the Best Channel

Most campaigns use several digital marketing channels, such as social media, email, and out-of-home. By measuring ROAS across all your channels, you can see which gives you the most bang for your luck, letting you focus on those and ditching any draining your budget for little reward.

2. Take Out the Guesswork

Once you know what works and doesn’t, use that insight to build future digital marketing strategies and campaigns. Thoughtful planning saves more money and brings faster results. Also, you can justify your ideas to management when you have the data to back them up.

3. Make Reporting Easy

Firms like ROAS, due to its simplicity, ads go out, and money comes in. It’s a quick snapshot that’s easy to explain, even to non-marketers.

4. Optimize Your Ads

You can discover which images and words resonate with your prospects by comparing the return on ad spend across multiple ad creatives. Later, offer them more of what they like.

Disadvantage of Using ROAS

Even ROAS has its drawbacks, a few you should be aware of:

1. You Don’t See a Bigger Picture

Your ads don’t exist in a vacuum. It may be a Facebook advertisement that someone clicks on, but that might be because they have already seen a poster, read a review, been nudged by a friend, or already know and like your brand. Advertising is one part of the marketing mix, making it difficult to prove that returns are entirely due to spending on one advertisement.

2. Doesn’t Show Volume

You get positive ROAS with a relatively small number of customers. Perhaps you ran a low-cost campaign, so your revenue looks high in comparison. However, how much higher could it be if you would succeed in attracting more consumers?

3. Focused on the Short Term

You can set the timescale for which you want to measure ROAS. However, it tends to be relatively shorter. That’s because you are measuring behavior that can be directly linked to a specific ad. To know your revenue over the longer term, you must look at the consumer lifetime value (LTV).

Also Read: Highest Paying Digital Marketing Jobs in India (2024 Details)

Factors Influencing Your ROAS

Some of the most significant factors from a general marketing perspective that can make or break your ROAS are:

1. Ad Creative and Copy

A scammy-looking ad doesn’t persuade anyone to give out their credit card details. The more compiling and engaging your videos, images, and copy are, the more likely they are to lead to conversions and better ROAS.

2. Ad Placement

Different ad placements have different costs and may yield different results. Choosing the appropriate placements for your digital marketing objectives and audience improves your ROAS.

3. Targeting

The accuracy of your targeting significantly influences your return on ads spend. If you are trying to sell golf clubs to avid soccer fans, chances are no matter how good your pitch is, they simply won’t convert.

4. Bidding Strategy

When running ads on any channel, you are always in a bidding war with your competitors. A solid bidding strategy ensures you find a place on your audience’s feed. 

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Effective Tips and Tricks to Improve ROAS

Below are a few tips and tricks to help you get more effective results in your digital marketing strategy.

1. Segment Your Prospects

To improve your ROAS, first understand who you are selling to. Segmenting your target group enables you to target your ads to those interested in your products/ services, boosting your chances of getting a sale. You can segment by age, location, geography, interests, and buying behavior.

2. Optimize Your Ads

Here, the goal is to make your ads as attractive and relevant as possible to your target audience. Experiment with diverse images, titles, and descriptions to see what works best.

3. Use Customized Landing Pages

Personalized landing pages are an effective tool to enhance your ROAS, as they allow users to get more information about a particular product/ service, which increases the conversion rate. Ensure your landing page is relevant and more accessible to navigate.

4. Track Results

Follow-up is a must to enhance your ROAS. Constantly monitor the performance of your ads and adjust your strategy accordingly. Use analytics tools to track your performance metrics and clearly understand the working plan.

5. Test and Repeat

This is the key to improving your ROAS. You must experiment with numerous strategies and adjust your tactics depending on the results. 

Remember, improving your ROAS is not easy; however, with the right strategy and tactics, you can increase your ROI and make your digital marketing efforts more effective. 

Also Read: Is Digital Marketing Hard to Learn? 2024 Career Guide

FAQS on ROAS in Digital Marketing

1. What is ROAS?

The full form of RAOS is the return on ad spend in digital marketing. ROAS is a marketing metric that measures the revenue earned for every penny spent on advertising. A high ROAS indicates a successful and profitable campaign, while a low ROAS suggests changing your approach.

2. Why is ROAS important? 

ROAS is crucial for app marketers to assess the effectiveness of their advertising campaigns. It guides decisions on investing your budget for optimum results and where to scale back.

3. What is break-even ROAS?

Break-even ROAS is the point at which the revenue from an ad campaign equals the advertising costs. This means you have made neither a profit nor a loss. Calculate break-even ROAS using this formula: 1 divided by average profit margin percentage. 

4. What is a target ROAS?

Target ROAS is a bidding strategy where you set a specified revenue goal for each dollar spent. It can be tailored to particular campaign goals, but you’ll need a minimum number of conversions to be effective.

5. How can you improve ROAS?

To boost your ROAS, you should set clear benchmarks and continually test and optimize every aspect of your campaigns, channels, and creatives. Use research and predictive analytics to identify your most valuable customers and work to re-engage them, looking at the entire user journey. Lowering your advertising costs and experimenting with bidding strategies will also help.

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The value of ROAS in digital marketing cannot be underestimated. It’s a critical metric that offers profound insights into the effectiveness of advertising campaigns, helping businesses understand the direct return on their ad spend. While it doesn’t paint the complete picture of business profitability, it remains an invaluable tool in the marketer’s arsenal to evaluate ad performance and guide strategic decision-making. 

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  • Puja Sutar

    Puja Sutar is a proficient Content Writer at WsCube Tech. She holds B.Tech. in Electronics & Communication, and M.Tech. in VLSI Design. Her passion for technology and communication is evident in her insightful articles that simplify complex concepts for readers. Puja's writing is a valuable resource for tech enthusiasts and learners alike.