Balancing the books is always a bit of a tightrope walk. Sometimes you will keep employing systems that are unnecessary, and sometimes you will just want to expand, but can’t due to budget issues.
This is especially true if you are trying to calculate how much to spend on an ad campaign.
Advertising campaigns are necessary to expand a business, but it is very hard to gauge exactly how well they are doing since they are a bit of a slow burn.
It can take months to see success with them and unless you ask consumers personally whether the advertising helped them purchase, then it can be hard to see whether they worked.
This is where ROAS come into play. These metrics are key to understanding how well your ad campaign has converted into real world revenue. But how do you calculate ROAS? Today, we are going to find out.
What Are ROAS?
ROAS stands for ‘Return On Ad Spends’ and it is a metric that is designed to tell you how much money you are getting in returns as a direct result of the amount you spend on advertising.
As you can imagine, this calculation is hard to work out, but there is a lot of programming and software there to make understanding it easier.
This is particularly true if you are running an advertising campaign through Google Ads and linking it to Google Analytics, as Analytics will tell you how well your campaign is doing overall.
It will give you exact statistics on the impressions, clicks, and even the conversion rate of your campaign.
The way you normally calculate it is by taking the total revenue you earned from your advertising campaign and dividing it by the amount you spent on advertising overall.
So, the calculation would be: Revenue received from advertising / advertising expense = ROAS.
To make an example for you, let’s say you spend $3000 directly on Google Ads or your advertising campaign in general and that directly from that advertising (i.e. users clicking on the ads and buying something) you made $5000.
5000 / 3000 = 1.66. Now you times that 100 to make it a percent. So, 1.66 * 100 = 166.67%.
This is your direct return as ROAS. Normally, you want your ROAS to be above 400% as anything below that number is showing that you are not making good returns and are in fact overspending or underachieving on your ad campaign.
Are ROAS And ROI The Same Thing?
They are very similar, but they are not the same thing. ROAS, as we said earlier, is ‘Return On Ad Spends’ and ROI stands for ‘Return On Investment’.
When we are looking at ROI we are looking at the measurement of strategic investment over a long period of time, normally years, however when we are looking at ROAS we are looking at a measurement of tactical spending normally over a short period of time, within a day, weeks, or maybe months if we are pushing it.
When you break it down, it is simpler to understand.
ROAS will measure the return of one specific ad campaign, maybe one advert you are deploying on certain websites, whereas ROI will measure the return of the overall investment, basically the entirety of the time you have been advertising on certain platforms.
ROAS also only considers the cost of advertising in its calculation, whereas ROI considers the entire project – so the production and shipping as well – into the calculation.
Finally, ROAS looks at revenue, whereas ROI looks at profit. What this means is that ROI will more succinctly tell you whether your ad campaign is making the company or business money overall.
ROAS will tell you whether the ad campaign is making revenue, but not necessarily profit, as it leaves out key pieces of information that are used to measure profit.
For example, your ROAS is good, but it doesn’t factor in rising shipping costs, then you won’t be able to tell that it is losing you profit.
The Limits Of ROAS
While ROAS is a great tool to understand how well your short term revenue stream is doing, it does have its limits, and it does have its problems.
Like any piece of statistical data, ROAS relies on the information you put into it to determine how well it is doing.
As such, the value of ROAS to your business will be determined by your campaign’s goals, the amount spent on the campaign, and the conversion factors.
However, this does not include a lot of information. What if your ROAS is high, and you are still losing money?
It might be that the product costs too much to produce or that it is a subscription based product that drops off at certain points of the year.
As such, it may be that despite having a high ROAS, the campaign needs to be discontinued for reasons outside of the ROAS calculation.
While this may seem like a problem, it also works to show what to do for next time.
If your ROAS was high, it means that the advertising was at least somewhat successful and so it is worth employing the same tactics and ideas you put into your campaign again, when you need to run a new campaign.
The best solution to problems employing ROAS is to not employ it alone.
Using multiple different metrics will help you to see overall how well this part of the business is faring and whether you need to expect some shocks or surprises in the future.
Using ROAS and ROI in tandem is especially useful and may help you avoid problems later on.
ROAS stands for ‘Return on Ad Spends’ and it is calculated by dividing the revenue received from advertising by the advertising expense.
Using ROAS can really help you to understand how well your ad campaign is doing in its own right and in the short term. It is an incredibly useful tool that is made better when combined with other business metrics and statistics.