Return on Ad Spend (ROAS) is one of the most important metrics companies measure and track to evaluate the effectiveness of their paid advertising campaigns.
Getting results from paid ads isn’t as easy as it used to be, and eCommerce specialists need to find new ways to fine-tune the campaigns for efficiency and higher ROAS.
Let’s see what ROAS is, how it is different from ROI, how you calculate it, and what you can do to improve this important metric for analyzing ad performance.
What is ROAS?
Return on Ad Spend (ROAS) is a metric that helps you measure the revenue generated by an ad campaign compared to every dollar you spend during that advertising campaign. In other words, ROAS is a metric that shows how wisely you spent your advertising budget on a specific ad campaign.
Measuring the current ROAS helps you evaluate the efficiency of your ad campaign and stop it if numbers show that it’s not profitable.
When you’re keeping track of your ROAS, you’re more likely to get better at setting a target ROAS for your next campaigns and generate a positive impact on your store’s bottom line.
ROAS is one of the most important performance indicators online businesses measure, along with click-through rate, conversion rate, and ROI.
We want to emphasize one aspect because we see misleading information online about Return on Investment and Return on Ad Spend.
ROI and ROAS aren’t the same, although they are both metrics that help you calculate the effectiveness of your ad campaigns.
To put it simply:
- Return on Investment helps you calculate the profitability generated by an overall investment.
- Return on Ad Spend enables you to calculate the revenue generated by a specific ad campaign.
First, let’s see how you calculate ROAS and ROI, and then we’ll look at an example to better understand the difference between these two metrics.
How to calculate ROAS
The formula for calculating ROAS is simple: you have to divide the revenue generated by your ad campaign by the cost of the ad campaign.
ROAS = Revenue / Cost per ad
For example, if your marketing budget for last month’s ad campaign was $3,000, and that campaign generated $12,000 in revenue, then your ROAS is a ratio of 4 to 1. For every dollar that your company spent during last month’s ad campaign, your online store generated $4 worth of revenue.
Now, let’s take a look at the formula for ROI:
ROI= (Revenue – Cost) / Cost
We’re using the same numbers as in the example above to underline the difference and calculate the ROI for the same ad campaign.
With a revenue of $12,000 and a total ad spend of $3,000, your ROI is 3.
While ROAS helps you see how much revenue you can generate for each dollar spent, your ROI reflects what is your store’s profit after ad costs.
Both metrics are important to measure and monitor. Just make sure you use complete and accurate data.
Pay attention to all factors that determine the total cost per ad, including vendor costs, salary costs of the in-house paid ad specialist, affiliate commissions, and any other associated costs that influence results.
> Read Valentin Radu’s recommendations for when your ROAS goes down.
The next question that pops into mind after calculating ROAS is, “Do I have a good ROAS?”
As with many KPIs, the correct answer is “it depends.” Let’s explain why.
What’s a good ROAS?
Any value that exceeds your break-even ROAS and helps your online business stay profitable is a good ROAS.
It’s tempting to compare yourself to other stores, but you should keep in mind that your break-even ROAS value is unique for your eCommerce store, and it changes over time:
- If your store is pretty new on the market, you would probably want a ROAS that ensures higher profit margins.
- If your brand is already popular and you want to gain market share, you could afford to pay more for your ad campaigns.
The break-even ROAS formula is:
Break-even ROAS = 1 / Average Profit Margin %
Calculating the break-even ROAS reminds you that you have to pay attention to what you call “a good ROAS.”
Let’s say that during your latest ad campaign, you promoted one product – your newly launched yoga starter kit.
You’re selling this product for $120, and the COGS associated is $60. If your ROAS is 1.6, meaning you’re making $1.60 for every dollar you spent during that ad campaign, it might seem like a good ROAS.
But when you calculate the profit margin, you realize that you’re actually losing $13.50 with every purchase generated during that ad campaign.
In this case, with a 50% margin, you can’t spend more than $60 per purchase if you want to break even, and your ROAS has to be at least 2.
Calculating break-even ROAS helps you set a better target ROAS for your future ad campaigns. It’s good to look at the big picture when you do the math for your ad budget.
You’ll see that deciding what a good ROAS is for your store can get complicated when various factors can influence the success of your campaign.
It would be harder to calculate COGS and profitability for a campaign that promotes various products.
Also, if you’re running a brand awareness campaign, you’ll have to use an attribution model as your target audience won’t place an order right away.
“No one should be doing manual bidding. In the last few years, ROAS bidding and automated bid systems have become so good that users should not manually bid, especially on thousands of SKUs.”Brad Geddes, Co-founder at Adalysis, Author & Keynote Speaker
> Read more in our interview with Brad Geddes about using Google Ads to support your eCommerce’s acquisition and retention strategies.
How to improve ROAS
As you start analyzing the performance of your latest ad campaign, you might notice that besides low ROAS, you’re click-through rate and conversion rate are also low.
The reasons behind poor performance vary from poor audience targeting, messaging, and creatives to suboptimal landing pages and frictions during checkout.
So, what can you do to improve ROAS?
Improve targeting by using custom audiences
Your customer data is one of the most valuable assets you can use to get higher ROAS. Custom and lookalike audiences help you get the right message to the right person at the most suitable moment possible, increasing your chances of generating a new conversion.
Use your best customers to create lookalike audiences for your customer acquisition ad campaigns. Create custom audiences to re-engage with your most loyal customers, prevent churn of the dormant customers, and generate a second purchase in newly acquired customers.
> Learn how to create the best custom audiences for Facebook Ads.
Apply CRO tactics for your landing pages
If you’re driving paid traffic to suboptimal landing pages, you’re just throwing money out of the window. When you analyze your ad performance and see high CTR but low CR, it means your creatives were convincing enough, but your landing pages weren’t.
To convince new people you’re the online store they should order from, you have to create a memorable and pleasant shopping experience. To generate a new purchase in existing customers, you need to remind them why they started buying from you in the first place and how good your company is at generating top customer experiences.
Simplify the checkout process
High cart abandonment isn’t something you should ignore. If people are not completing an online purchase because of your complicated checkout process, you need to simplify it ASAP.
People expect multiple payment options, want to order without an account, and look for clear information regarding delivery costs and other fees/ taxes that you might apply. A simple and transparent checkout process will have a positive impact on ROAS.
If you’re not happy with your ROAS results after your ad campaigns, you have to stop and analyze your efforts so far to see what’s causing low ROAS.
You might start with a ROAS analysis and end up with a CRO plan. A low ROAS can represent nothing but a symptom of low-performing processes and ineffective approaches of your marketing department.
Your worries about lower ROAS are justified, and we see many specialists in eCommerce trying to find new ways to approach this challenge.
Our experience working with online shops showed us that the most sustainable approach to ads remains customer-centricity, optimizing your online business for conversions and improving customer lifetime value with better acquisition and retention strategies.
You can start improving your targeting right away by trying our dynamic Audience Builder feature so you can increase your chances of generating higher ROAS with your next ad campaign.
Frequently asked questions about Return on Ad Spend
There are multiple factors that determine if you have a good or a bad ROAS. Usually, any value that is above your break-even ROAS is a good ROAS. Besides ad spend costs, you should also look at COGS and profit margins to see if your ad campaign is profitable.
Return on Ad Spend is calculated by dividing the revenue generated during the analyzed ad campaign by the cost per advertising of the ad campaign. If your budget was $1000, and your ad campaign generated $5000, your ROAS is 5 to 1, meaning you generated $5 for every $1 spent.
There’s no unique answer for what is a good ROAS percentage. The break-even ROAS value is unique for your eCommerce store and varies because ROAS changes over time. This is why specialists’ advice is to measure ROAS and ROI to ensure your ad campaigns are profitable.
ROAS helps you analyze the efficiency of a particular ad campaign. By calculating ROAS, you determine how much revenue was generated for every dollar spent during the analyzed ad campaign. Ecommerce stores use it to set better target ROAS and improve ad performance.