What is Return On Ad Spend (ROAS) and how to calculate it?
The efficiency of your advertising campaigns plays a significant role in your online success: if you can capture your prospects’ attention, quickly inform them about your product or service, and guide them to conversion, your revenue increases, you can invest, and the growth cycle continues. But how can you be sure your ad campaigns are effective, and can you measure that effectiveness? In this guide, we examine a key metric that answers these questions: return on advertising spend (ROAS). And we will show you how to increase it, too.
Beyond organic online marketing, paid advertising campaigns offer a reliable way to generate new leads, raise brand awareness, and drive consumers to your e-commerce shop. When analysing the effectiveness of your advertisements, there are many metrics you can use, including:
- Return on investment (ROI)
- Click-through rate (CTR)
- Cost per conversion (CPC)
- Amount of clicks
- Paid website traffic
While each of these metrics has value, the best way to truly understand the efficiency of a specific ad or campaign is return on advertising spend (ROAS).
What is Return On Ad Spend (ROAS)?
Simply put, return on advertising spend (ROAS) is the profit you gain from each euro, dollar, or pound you spend on advertising. Your ROAS score offers you a simple way of analysing the performance of a given advert in clear financial terms. In other words, it shows you how much you get from the money you put into your advertising.
How do I calculate ROAS?
To work out the ROAS for any advertising campaign, you need to know two values:
- The revenue you received directly from your advertisement
- The money you spent on the ad or campaign.
Then you divide the revenue by the money spent. The resulting number shows how much money you gain from each unit put in, like one dollar, euro, or pound. Here is the ROAS formula:
Revenue (€ / £ / $) / Ad spend (€ / £ / $)= Return on ad spend
For example, if you spent €1,000 on an ad campaign and made €2,000 in revenues, you would use this formula to give you a ROAS of 2:
Revenue (€2,000) / Ad spend (€1,000) = ROAS of 2 (or 2x, 200%, 2:1, or €2)
The above shows that you make twice as much profit per unit of currency you put into your advertising. The ROAS score can be expressed as a multiplier (2x), a percentage (200%), a ratio (2:1), or a currency amount (€2).
Why is ROAS important?
ROAS gives you insight into the financial side of your adverts. If your ads are of lower quality and go unnoticed by your prospects, you will likely have a low ROAS. This can indicate that you need to improve your ad campaign or stop it entirely, as it might not be worth the investment.
A higher ROAS score indicates that your ad is effective and delivers a strong return on your initial investment. And a successful effort can be further optimised: you may be able to use your ad across new channels or run A/B tests to enhance its performance.
Overall, ROAS lets you see the effectiveness and quality of your adverts and shows you where you need to improve. It can help you avoid unnecessary ad spending or increase the revenue from a particular campaign. It is important to note that ROAS only provides data for a specific ad campaign; it cannot tell you the profitability of your products or your company.
3 tips to increase your return on ad spend (ROAS)
With the ROAS formula, you have two simple ways to improve the financial efficiency of your advertising: either increase ad revenue by creating higher-quality ads or reduce ad spend. Here are three additional tips for increasing and improving your ROAS:
1. Improve your ad content
By continually fine-tuning your advertising copy and visuals, you can ensure you are engaging your audience and showing them the true value of your product or service. All of this while trying to convert them or tempt them to find out more about your company. From a detailed A/B testing approach to simply rewriting and redesigning an entire campaign from scratch, turning more prospects into converts is a clear way to improve your ROAS.
2. Optimise every part of your campaign strategy
For paid advertising campaigns, adjusting the details can help improve your ROAS. By taking steps like focusing your budget on a specific market segment or adding negative keywords to exclude irrelevant search terms from your campaign, you can reduce wasted ad spend. As for increasing ad revenue, there are many ways to do that. For example, you can boost your conversion rate by reducing the steps required to complete a purchase in your store and ensuring the route is clear.
3. Invest in marketing automation solutions
One surefire way to increase your ad revenue is to adopt marketing automation and data-driven personalisation tools. By using the data you collect to deliver personalised ads to your prospects, you can increase the relevance and quality of your ads, leading to a higher ROAS. With personalisation tools like Spotler’s personalised advertisements, you can ensure that you meet your customers’ wants and needs while reducing waste spending by targeting well-defined market segments. This will help you raise awareness, increase brand exposure, and convert prospects efficiently.
Conclusion
With return on ad spend (ROAS), you have a simple metric for understanding the performance of your online ads and where, when, and how you need to improve. Your ROAS score can help you plan your next steps, from putting more capital into your successful ads to creating a new, optimised campaign to reach your audience and increase your revenue. Whatever your current situation, adopting future-proof marketing tools, such as personalised advertising and tailored customer journeys, can take your ad campaigns to the next level. And with this, you can increase your ROAS, reach new markets, and grow your online business.
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