Advertising and marketing campaigns are incredibly complex. You have to factor in the customer journey and niche it down to fit your target audience. When you launch advertising campaigns, you need to have defined goals to measure their success.
One such goal is return on ad spend (ROAS). Most businesses don’t know how to calculate ROAS for their marketing efforts. Our talented crew at Rival Digital created this step-by-step guide to walk you through the process and give your brand an edge.
What Is Return on Ad Spend?
ROAS stands for return on ad spend. The acronym refers to the money spent vs. the money earned from an ad campaign. It’s one of the most important metrics to measure your ad campaign performance since it deals with the profit margin your efforts created.
When you set your ROAS goal, you essentially set the stakes for the ad revenue amount you expect or need the campaign to earn. Don’t confuse the term with similar words, like those listed below.
ROAS vs. ROI
Return on investment or ROI examines how much revenue your overall marketing efforts rake in. In other words, you invest a portion of your profits into marketing materials over a sustained time frame. You determine ROI over the course of a year or so. Return on ad spend examines specific endeavors, like a single advertising campaign.
ROAS vs. ACOS
Some people also confuse return on ad spend with advertising cost of sales. These two metrics go hand in hand. ACOS explores the increased percentage of the revenue generated while ROAS predicts the exact amount you can expect to earn from your total ad spend.
Why Is ROAS Important?
ROAS helps you predict what to expect from a branded campaign. You can use the information to choose between a TikTok or Facebook ad based on its projected success. You can also learn how investing in other marketing tools might lower your profit margin or boost sales.
What ROAS Calculation Should You Aim Toward During Your Ad Campaign?
How can you tell the difference between a high ROAS and a low ROAS? First, you should set an achievable ROAS goal that produces enough revenue to cover every dollar spent on advertising efforts like:
- Landing pages
- Ad copy
- Campaign fees on chosen ad platforms
Whatever tools you spend money on should contribute to a good ROAS ratio. Then, you can find that sweet spot that covers the costs and spills into your profit margins. You can test the waters by running two different ad campaigns with one changed variable between them.
When you develop the campaign, focus on:
- Enhancing customer lifetime value.
- Inspiring existing customers to spend more.
- Helping potential customers make informed decisions about your brand’s products.
You can then figure out how to calculate ROAS.
Calculating the Return on Advertising Spend for Ad Campaigns
Where do you start when calculating ROAS? The most basic formula involves determining how much you’ll spend on the first campaign’s marketing strategy. Then, find the revenue the campaign generated.
Divide the revenue by the money spent, voila! You are calculating ROAS. You can use a more data-driven approach for more in-depth metrics.
Learning About Ad Spend Through Excel
A spreadsheet is a handy tool for tracking every useful marketing metric within your campaign. You can find resources online that show you how to program the sheet to calculate the costs for you. This approach will save time and effort.
Google Ads Campaign Formula
Some platforms have specific formulas for measuring ROAS when you use their tools. For example, you might run a Google Ads campaign. Ideally, Google Ads generate revenue by the dollar amount. If you spend 20 cents to place your ad in a search engine, you could earn a one-dollar profit margin for a ROAS of 500 percent.
The Break-Even ROAS Formula
This ROAS formula is a little more complex. You might need a ROAS calculator to work the campaign percentages into the equation, which looks like this: break-even ROAS equals one divided by the average profit margin percentage. The ROAS calculated here shows whether you’ll lose money or make just enough to cover the ad spending costs.
How to Calculate ROAS
When tracking ROAS, you don’t just want to break even. If you spend a dollar on a campaign but earn a dollar back, you aren’t earning additional revenue to push your business forward. Your target ROAS should push beyond the break-even ROAS formula.
So, let’s say you spend a dollar. You should aim to earn two dollars for every dollar spent. That puts your ROAS ratio at 2:1, which is a decent return on investment for your efforts. But many business owners and marketers make mistakes when finding an ideal return on ad spend.
Mistakes to Avoid When You Calculate ROAS
While ROAS formulas work beautifully for predicting campaign success, they have their limitations. If you don’t consider those limits beforehand, you will find yourself in trouble budget-wise.
- Consider other digital marketing efforts within the advertising strategy when making a ROAS calculation. Don’t forget other details outside of your ad platform, like additional social media profiles and website performance.
- Focus on the big picture, not just direct ad spend. Some formulas only account for the money spent on the platform. They don’t factor in all the little details, like copywriting, designing landing pages, vendor fees, and additional expenses that make for a well-rounded campaign.
- Organic metrics also have value. Someone within your target audience might encounter an ad but click away. They may return to your website or social media profiles later. ROAS doesn’t consider this factor.
- Measure your metrics in a timely fashion. Most metrics are time-sensitive. You won’t learn nor can you tweak your campaign and spending without consistently monitoring the data.
Ensure Successful Ad Campaigns With Rival Digital
Rival Digital’s experienced marketing team knows how to calculate ROAS and build a successful marketing campaign for your bread. Contact us about your next ad revolution and set a good ROAS goal that’s also achievable.
