As the name suggests, return on advertising (ROAS) is a calculation that indicates the profit that a company makes from advertising. This calculation represents the amount spent compared to the amount earned on an advertising campaign. In this article, we will discuss the importance of the ROAS metric and shed light on how you can calculate your return on advertising spend for your advertising campaign.
As a business owner, it is always important to keep track of your returns on investments. Advertising is, without a doubt, one of the biggest investments that business owners make. Therefore, knowing which marketing methods are working, or returning on your investment, can help you determine what is working and how you can enhance your future marketing efforts so you can see a better return.
Calculating Your Return on Advertising Spend
The formula used for calculating ROAS is pretty simple:
(revenue/spend) = return on ad spend
For example, if you spend $10,000 on a paid search and it generated $40,000 in revenue, your ROAS for your paid search campaign would be $4 dollars to $1; you made $4 worth of revenue for every dollar you spent on your paid search campaign.
Factors to Consider When Calculating Return on Ad Spend
There are more costs associated with advertising than just the listing fees. In order to really determine your costs and to find out the return that you are receiving on an advertising campaign, there are some factors that you are going to want to take into consideration when calculating your ROAS. These factors include:
- Costs associated with partners and vendors. Often, there are fees and commissions associated with both partners and vendors that help on ad campaigns. Make sure you keep this in mind when determining your ROAS.
- Affiliate commissions. If you have any affiliate, make sure you factor in the amount that you are paying out to them, as well as any network transaction fees that may be associated with paying them, when calculating your ROAS.
- Clicks and impression. You also want to factor in the average cost per click, the total number of clicks, and the cost per impressions when determining your ROAS.
What ROAS Tells You
At the most basic level, return on investment spending lets you know if a marketing channel is performing at the level that will make it profitable, or worth your investment. With this metric, the higher your ROAS is, the better, as a higher amount indicates that a specific form of advertising is generating a profitable amount of revenue.
What is an Acceptable Return on Ad Spend?
The answer to this question really depends on the type of business you run and the type of advertising you use. For example, for some businesses, a return on ad spend of $4 for every $1 spent is excellent; however, for others, a $10 return on ad spend for every $1 spent may be necessary in order to be profitable.
Why Return on Ad Spend is Important
Return on ad spend is vital if you want to quantitatively evaluate the performance of your ad campaign and learn how it contributes to your bottom line. The insights presented by ROAS can help you make adjustments to your future advertising budgets, improve your marketing strategies, and enhance the overall direction of your marketing efforts. In short, staying abreast of your ROAS can help you make the most informed decisions regarding where you should invest your advertising dollars.
Why You Should Start Using ROAS
When the return on ad spend metric is used in combination with your CPL and CPA goals, it gives you a better idea of the actual performance of your marketing channels. In short, ROAS can give you greater insight into the efficiency of your ad campaigns and help you find out if you are making a wise investment, or if any changes need to be made.