What is Return on Ad Spend, or ROAS?
Return on Ad Spend, or ROAS, is a metric used in the advertising world to compare revenue to the cost of advertising campaigns. The purpose of the calculation is to measure the effectiveness of a marketing campaign.
How to Calculate ROAS?
The simple formula for calculating ROAS is to divide revenue by the cost of advertising.
How Does ROAS Work?
Understanding whether an advertising medium (such as a billboard or digital platform) is driving sales is extremely important for businesses. Knowing ROAS allows companies to determine if their marketing strategies are worth the money and effort expended. A company’s success can depend on whether ROAS is profitable (especially concerning a new product launch).
Businesses need to know (preferably at the start of a new effort) whether a particular advertising campaign is performing as expected. If it is not, they should withdraw immediately to mitigate the effects of a failed campaign. Regardless of the platform a company chooses for its ads, a poorly planned campaign can incur substantial losses quickly.
ROAS calculations can be general or specific. You can calculate ROAS for total advertising expenses and compare it to your overall revenue, or you can target spending and revenue in a specific area. There are many free and paid online services that can help businesses track their ROAS. These services are critical because they allow companies to set viable figures and goals. For example, businesses can use Google Ads or similar services to help them determine whether a particular advertising campaign is working.
When ROAS drops to a certain level in specific areas, companies may be able to target those campaigns to improve the figure. For example, sites using banner ads may suffer from a ROAS lower than desired, and thus advertisers may consider using “pay-per-click” or “cost per acquisition” types of ads instead. This can generate a larger profit margin for ROAS. ROAS can also be used to track conversion rates – the higher the conversion rate, the higher the ROAS.
Limitations of ROAS
Relying solely on ROAS metrics can be misleading. The value of ROAS for a company depends on the goals of the advertising campaigns, conversion factors, and how much is spent. Some campaigns may have high ROAS, but the company may end up losing money because the product they are selling costs too much to produce and ship, given the advertising budget. This can be particularly true when these costs are combined with the overall cost of advertising.
However, this does not necessarily mean that the marketing effort was unsuccessful. ROAS is calculated solely with regard to the cost of advertising, so it may not consider other factors that actually affect profits (such as an unexpected increase in shipping costs).
The average ROAS may vary from one advertising medium to another. It may not be effective to compare ROAS among campaigns without first considering the average ROAS figures for those media.
Not all forms of advertising are easy to evaluate individually. Some tools allow the company to assess the effectiveness of online or email advertisements with relative ease, but not all media are easy to track in detail. For example, it is difficult to determine how many people purchased a product specifically because they saw a billboard about it on the highway.
Conclusion
Return on Ad Spend, or ROAS, is a formula that helps companies determine the success of their advertising efforts. ROAS is calculated by dividing revenue by the cost of advertising. Since ROAS only considers revenue, it may not help companies identify other issues with products, such as high production costs or shipping expenses.
Source:
https://www.thebalancemoney.com/roas-and-how-is-it-calculated-2295469
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