Return on ad spend (ROAS) - an introduction
Return on advertising spend (ROAS) is a marketing metric that measures the efficacy of digital advertising. ROAS helps online businesses evaluate effectiveness of different advertising campaigns, channels or methods, to help determine how well they're working and how they can improve future advertising efforts.
What is return on ad spend (ROAS)?
Return on advertising spend (ROAS) is a metric that measures the amount of spend on advertising (typically digital spend) in comparison to the revenue it generated in a certain period of time. It’s either expressed as a number or a ratio, so the higher the number, the better the return. For example, 5 or 5:1 means that for every £1 spent on advertising, you make £5 revenue.
By measuring ROAS you can see the relative return on marketing regardless of the size of spend in that period, or the revenue generated. This shows a normalised view when you compare two or more periods.
Why is ROAS important?
ROAS is important as it allows a business to measure the effectiveness of advertising spend, whether this across the entire business or segmented down to specific campaigns or geographies. Being able to understand your ROAS will allow you to better use marketing budgets, focusing on areas that generate a higher ROAS.
A marketing campaign could be tested for a period of time, and monitoring the ROAS allows the business to make quick decisions to its effectiveness.
Investors will often look at the ROAS and expect to see an improvement in ROAS over time, demonstrating traction and brand growth. A higher ROAS will also indicate your marketing has been effective, targeted at the right audience and you have a sustainable business model.
Being able to test fast and react quickly is key, making sure digital marketing spend isn't wasted on campaigns which are ineffective. By closely monitoring ROAS, e-commerce companies can make informed decisions on where to invest their advertising budget and how they can become more efficient with their marketing spend.
How can I improve my ROAS?
Segmenting ROAS by regions, campaigns or another type of cohort can help better identify and understand better and poorer performing campaigns to implement improvements across the wider business and campaigns.
Other aspects that can influence ROAS are website conversion rate, average order value (AOV) and continued improvement in audience targeting. Essentially, it's about trying to increase the revenue number for every £1 spend on marketing.
What does good look like?
While there’s no set benchmark, generally a ROAS over 4 would be considered good, but the ROAS you need depends on a number of factors. For example, a business with a high gross margin could survive and thrive on lower a ROAS than a business with lower margins.
What does ROAS look like?
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How do you calculate ROAS?
The formula to calculate ROAS is:
Return on ad spend (ROAS) = Total revenue from campaign / campaign advertising spend
ROAS worked example
If a company has total revenue from a campaign of £100,000 and spent £15,000 on that specific campaign then its ROAS would be 6.7, calculated like this:
ROAS = £100,000 / £15,000 = 6.7
However, if the same company has total revenue across the business of £1,000,000 and spent £180,000 on marketing in the month, its ROAS would be 5.6, calculated like this:
ROAS = £1,000,000 / £180,000 = 5.6
In the above example, the individual campaign was more successful than blended ROAS across the business. This demonstrates the importance of segmenting ROAS by campaign to identify and understand better or worse performing campaigns to learn from.
Conclusion
Any good online business should understand, track and segment its ROAS to make better strategic decisions on how much, when and where to invest in web advertising spend. It can also help teams identify poor performing conversion landing pages or product mix. While there are other factors to take into account, generally, the higher the company’s ROAS the more effective the advertising is and the higher the revenue will be as a result.
