Digital Marketing

What is ROAS ? How Is It Calculated ?

What is ROAS ? How Is It Calculated ?

What is ROAS?

ROAS stands for ‘Return on Advertising Spend’. It measures how much revenue you earn for each dollar spent on advertising.

ROAS is similar in many ways to another important marketing metric, Return on Investment (ROI), but ROI is typically used to evaluate overall marketing effectiveness. In contrast, ROAS is often used to assess the effectiveness of specific campaigns, ad groups, ads, and even keywords.

ROAS is an incredibly flexible way to evaluate any aspect of your online marketing. Want to find out if a specific ad set is worth your time and money? Check your ROAS. Interested in knowing whether changes in your targeting are paying off? Check your ROAS.

How is ROAS calculated?

Contrary to some marketing calculations, calculating your ROAS is quite straightforward. There are two primary ways to calculate ROAS.

The first is to divide the revenue generated from your advertising campaign by the amount spent on that campaign:

Revenue / Cost

While this calculation is straightforward, it doesn’t give you much insight into the overall profitability of your campaigns. Spending $100 on a campaign and earning $200 may sound great, but what if it costs you $150 to fulfill the product?

The limitation of the above equation is that it doesn’t give you a clear idea of how much actual cash you’re earning from your campaigns. In a simple example like the above, it might not seem like such a big deal, but looking at your ROAS this way can lead to complexities when things get more complicated.

Therefore, some people prefer to subtract the cost from the revenue before dividing by the cost:

(Revenue – Cost) / Cost

Pretty easy, right? You take the total revenue generated by the marketing component you’re evaluating, subtract what you paid to run your ads, and then divide the result by your advertising spend.

The advantage of using this calculation is that it tells you what you’re really making from your campaigns. If you choose to approach ROAS this way, you could invest $100 and earn $200, but your ROAS would only be 1x. However, that 1x means you have an extra dollar in your pocket for every dollar you invested.

In my experience, most people seem to prefer the first equation over the second, which is more focused on return on investment, but both are valid. The important thing is to know which model you’re using and what it means.

Tracking ROAS

Of course, this ROAS calculator is only as good as the cost and revenue figures you put into it. Most online advertising platforms will track your ad spend for you, but tracking your revenue is up to you.

If you’re an e-commerce company, this should be relatively easy because you can directly track which clicks lead to which purchases. For example, if you’re running Google Ads campaigns, you can track purchases as conversions and then see how much money a specific campaign, ad group, ad, or keyword generated. Implementing this can be a bit challenging, so have your developer check out this article for more information.