How to Calculate ROAS to Support Your Business Analytics Strategy
Written By Sydney Thomas
Advertising campaigns cost money, and many companies need help understanding their Return On Investment (ROI) or Return On Ad Spend (ROAS). Most often, this is from a need for proper tracking and struggling to assign monetary values to your ads’ results (unless you are eCommerce.) Without ROAS, companies are left without insights into deciding whether or not to continue ad campaigns or optimize based on the results. Calculating ROAS is a foundational part of any organization’s business analytics strategy.
To make the best business decisions, you must understand and calculate ROAS. This blog discusses what ROAS is, how to calculate it, and what a good ROAS might look like.
What is ROAS, or Return on Ad Spend?
Return On Ad Spend measures the cost-effectiveness of your advertising campaigns. It helps businesses determine whether they are making a positive return on advertising costs or losing money due to not making enough from advertising.
A high ROAS is a positive indicator of performance, whereas a lower ROAS indicates that your campaign has an opportunity to be optimized. It’s also important to consider different marketing campaigns (such as Social Ads vs. Search Ads) and compare returns as different channels will result in different performances.
How Do You Calculate ROAS?
Revenue / Cost: The simple way to calculate ROAS to support your business analytics strategy is by dividing Revenue by Advertising Cost. The advertising cost includes:
- The campaign budget
- The campaign manager’s time
- Any other outside costs that you may have for that particular campaign.
For example, if a specialty foods brand spends $10,000 on a Google ad campaign and generates $30,000 in revenue, the formula is as follows:
$30,000/$10,000 : $3 or 3:1
In this example, a 3:1 return on ad spend means that for every $1 the brand spent, it generated $3 in revenue.
What is a Good ROAS?
Every brand and industry will have its own “good” ROAS. For some companies, a 3:1 ROAS is excellent, while others would consider that to be underperforming. If your ROAS is low, then you might increase ad spend to get a better return. On the other hand, if your ROAS is high, you may consider how to keep the campaign performing well and look into ways to mimic that effort in lower ROAS campaigns.
Sources indicate that the benchmark ROAS for Google Ads campaigns is 2:1, an average return of $2 for every $1 spent. Further, focusing specifically on Google Search Network, that amount increases to $8 for every $1 spent.
The 3 Benefits of Calculating ROAS
Calculating ROAS will help you:
1) Identify Scaling Opportunities
ROAS allows companies to determine the effectiveness of individual ad campaigns. By examining each campaign, businesses can determine which type of ads are performing well and scale those ads to drive the best results. Tip: Remember that a solid business analytics strategy involves constant monitoring. ROAS may decrease when you scale your budget, so be sure to consistently track your ROAS while scaling.
2) Determine Budget Re-Allocations
Spending a lot of money on ads does not always mean you will get high sales. On the other hand, spending wisely on your best ads can drive more sales. ROAS calculation results help you identify the ad sets on which you are overspending. In these cases, you should reduce your budget to protect your business from losses.
3) Guide Better Business Decisions.
Successful marketing strategies are rooted in data, and ROAS is one of your top performance indicator metrics for digital advertising. With multiple channels such as Social, Referral, and Paid Search, ROAS will help you determine which acquisition source will help you achieve your business goals.
Take Control of Your Business Analytics Strategy Today
Optimizing your marketing campaigns and properly planning your budget becomes easier when you have a solid business analytics strategy in place, and calculating ROAS is essential to supporting that strategy. You can gain a deeper understanding of performance metrics and scaling opportunities by using our ROAS calculator.
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