Enter your Ad Spend and the Revenue from Ad Spend to see your ROAS.
What does ROAS mean?
ROAS, or return on ad spend, measures the effectiveness of your advertising campaigns by calculating how much revenue is generated from every marketing dollar spent.
By calculating ROAS, you’ll be able to identify which digital marketing campaigns and strategies generate the most return, so you can plan which campaigns to scale and which to trim back on.
ROAS vs ROI
While ROI measures the overall profit generated from an investment (accounting for all expenses), ROAS looks at the campaign spend and the gross return generated from that ad spend. So while ROAS may be included in your overall ROI calculation, it should also be looked at separately to evaluate the effectiveness of your advertising campaign.
Why ROAS matters
While ROAS isn’t the only marketing metric you should measure, it’s one of the most important metrics for evaluating the effectiveness of your advertising campaigns.
Because it looks directly at the revenue generated from your advertising efforts, ROAS gives you an accurate picture of which ad campaigns and channels perform well. Once you’re able to identify your highest-performing ads, you can allocate more of your budget on those campaigns in order to scale your revenue.
Conversely, ROAS can also help you determine which ads are underperforming in order to cut back or optimize those campaigns.
How to calculate ROAS
The ROAS formula is simple: Revenue Generated by Ads / Cost of Ads. For example, if you made $5,000 off of $1,000 in ad spend, your ROAS would be $5,000/$1,000 = 5:1, or $5 in revenue per $1 in ad spend (500%).
LTV based ROAS
To better understand the performance of your marketing efforts, you need look beyond the immediate revenue generated from a campaign and consider the lifetime value (LTV) of a customer. LTV based ROAS combines your return on ad spend with the lifetime value of your customers and is a great way to look at long-term value of your marketing efforts.
Formula: (new customers x LTV) / Cost of Ads = LTV based ROAS.
For example, you invest $5,000 in a campaign which generates 5 new customers and your average lifetime value of a customer is $4,000. Your LTV based ROAS would be: (5 x $4,000) / $5,000 = 400%
Need help tracking lifetime value? An all-in-one CRM can help you track customer value from ads (and other channels) over time. We recommend HubSpot to our clients for its ability to collect data from multiple sources and create easy-to-understand reports that provide insight to your marketing efforts.
What is a good return on ad spend?
A good ROAS may range from $2-$4 (or more) per dollar spent on ads. $2 per $1 spent (200%) is a common baseline and average for ROAS, but many companies shoot for $4 per $1 spent on ads (400%). That being said, your ideal ROAS benchmark depends on your industry, profit margins, operating costs, and growth model.
How to increase ROAS
To help improve ROAS, you can increase your per-click conversion rate and/or decrease cost per conversion.
To increase your per-click conversion rate, focus on creating a consistent experience from ad to landing page messaging. Users who visit your landing page are expecting you to solve their problem or provide value based on what the ad is promoting. Also make sure to optimize landing page experience by A/B testing different versions.
Increasing your per-click conversion rate will have a direct effect on lowering your cost per conversion. You can also decrease your conversion cost by minimizing ad spend waste. This is accomplished by regularly reviewing and removing irrelevant keyword searches, adjusting audiences, and removing underperforming ad placements.
While ROAS can give you great insight on where to allocate your ad spend, keep in mind that your advertising goals may include more than just direct revenue. Advertising can help you raise brand awareness and collect leads that you can guide through your sales funnel.
If you’re looking for an advertising partner who can help you map out a holistic advertising strategy, we’d love to chat.
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