ROAS (Return on Ad Spend): Everything You Need to Know!

Return on advertising spend – or ROAS – is a metric used to assess the success of your advertising campaigns. Let’s take a look at how to calculate ROAS, why it’s important and what it can tell you about your business.


What is ROAS?

Return on ad spend provides a way for brands to measure how effective their advertising is.

By comparing your revenue with the amount of money spent on advertising, you can gauge the health of your business and the return you received for your investment.

The more impact your advertising messages have, the more revenue you’ll receive for each dollar spent. So the higher your ROAS is, the better your performance.

The ROAS formula can help brands figure out whether or not a strategy is successful. When tracked over time, it can also be used to assess whether campaigns are improving or deteriorating. It can even help pinpoint the specific tactics that boost your bottom line the most.


How to calculate ROAS

The ROAS formula is fairly straightforward. You simply divide your company’s revenue by the amount you spent on advertising during a specific period of time.

ROAS = Total revenue / Total ad spend

For example, if your total sales are worth $1,000 and you spent $200 on advertising, your ROAS would be 5. 1,000 / 200 = 5. So for every dollar you spent on advertising, you earned $5 back.

Your ROAS calculation may be broad or specific, depending on the data that’s available to you. You can figure out your brand’s overall ROAS, comparing your total revenue with your total ad spend across all channels and campaigns.

Alternatively, you can do a ROAS calculation to assess the effectiveness of a specific campaign. For instance, you could compare the revenue of a particular product with the money you spent advertising it. This is something to keep in mind for new launches.

If you use trackable digital ads, you can also compare the revenue generated from each campaign with the cost of running them. For example, companies using Google Ads should be able to see how much their spending and earning across their account. So they can easily calculate the ROAS of each campaign or ad group. This makes it easy to cut ineffective ads and replicate compelling ones.

However, it isn’t always easy to calculate the ROAS of a single medium. It is difficult to determine exactly how much revenue the likes of billboards, magazine ads or television campaigns generate. For this reason, it makes sense to calculate the overall ROAS of your brand before looking at individual digital channels.

It is also a good idea to calculate the ROAS of an advertising campaign several times during its runtime – at the start, midpoint and end. As a reference point, you can compare the results with other campaigns run on the same channels.


The importance of ROAS

Although the ROAS formula is fairly simple to use, it is one of the most important eCommerce KPIs to keep track of. Here’s why:

1. It safeguards against major losses

Advertising is an essential part of eCommerce marketing, but it is often the most expensive part too.

If a particular advertising campaign isn’t working, marketing executives need to know as soon as possible. This way they can tweak the messaging, reduce the budget or cancel it altogether. Otherwise, a weak campaign may run up hefty losses and hurt your brand’s bottom line.

2. It helps brands get better

By knowing the ROAS of a campaign, marketers can better understand their customers, what drives them to convert and the channels that engage them the most.

They can then scale these campaigns to improve sales. But they can also cut the campaigns that don’t work, driving up ROAS and reducing cost per acquisition at the same time. Brands that carefully track ROAS are more likely to make better business decisions when it comes to future budgets and marketing strategies too.

3. It can impress decision makers

While metrics like traffic, followers and conversions are all pretty useful. Return on ad spend allows you to demonstrate exactly how much revenue your advertising campaigns generate.

This is a solid indicator of the scalability of a brand and its products. So a healthy ROAS is great for marketers who want to secure bigger budgets, as well as businesses that need to woo investors.


The limitations of the ROAS formula

Return on ad spend is important. But if it is the only metric you rely on, it can be misleading. That’s why you need to track it alongside other key eCommerce KPIs.

The value you place on the ROAS measurement will depend on your brand’s advertising goals. For example, if you want to build brand recognition, awareness and visibility, a low ROAS isn’t necessarily bad news. But if you’re focused on generating sales, it’s essential.

It’s also worth noting that you can have a healthy ROAS and still lose money! The ROAS calculation only accounts for advertising costs. In reality, there are many other overheads that need to be paid for – think shipping, storage and production. ROAS simply indicates whether or not your advertising is effective. But you need to optimise all areas of your business to make a profit.


What is a good ROAS benchmark?

It is difficult to define what a good ROAS is. It varies between advertising channels and industry verticals. The likes of product pricing, profit margins and business maturity influence it too.

Any clear-cut figures set out are also liable to change as advertising costs increase. Digital ad spending is continuously rising. As a result of this increased competition, some retailers saw their online ad costs increase by 89% in the first four months of 2021. So if your ROAS calculation is diminishing, this could be a contributing factor.

A commonly used ROAS benchmark is 4. In other words, $4 in revenue is generated for every $1 that is spent on advertising. In fact, back in 2016, research by Nielsen found that 4:1 was the average ROAS ratio for CPG brands in the eCommerce sector.

However, startups are likely to need a higher ROAS to cover costs and finance growth, while established businesses can often survive with a lower one.

If you’d like to compare yourself against other brands within your industry, advertising tool Sidecar recently released a benchmark report. It outlines the average ROAS across Google, Facebook, Instagram and Amazon – all of which increased over the past year.

According to its research, these are the average retail ROAS metrics for each one:

  • Google paid search: 13.76
  • Facebook advertising: 10.68
  • Instagram Advertising: 8.83
  • Amazon advertising: 7.95

It also provided average ROAS figures for certain industry verticals. Here are some of the standout ones:

 Google paid searchFacebookInstagram
Apparel & accessories24.7315.3410.53
Automotive parts & accessories20.5217.9815.03
House & home13.1114.3317.42
Toys & hobbies23.295.715.47
Health & beauty7.19  

Final thoughts

Once you start tracking your return on ad spend, there are lots of strategies you can use to improve it.

Pushing up your average order value should increase it. So look at marketing tactics like upselling, cross-selling, shipping thresholds and product bundles. Exploring cooperative advertising opportunities is a great way to cut advertising costs and drive up your ROAS metrics too.

Of course, once you start tracking your ROAS, you’ll be able to identify other optimization opportunities too. Just make sure you take time to consider how you can get the best return for your investment.

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