How to Calculate ROAS (Return On Advertising Spend)

Among the various metrics to monitor in web marketing, ROAS helps you understand whether your investment in paid advertising campaigns is actually paying off. Here we explain what it is, why it is important and how to calculate it.

I don't know how much you like dealing with numbers and data, but know that if you deal with web marketing... well, you can't pretend they don't exist!

You might not be as enthusiastic (as I am), but all of us marketers live and breathe in a competitive world of metrics to keep an eye on every single day. Just think about the number of clicks, the CPM, at churn rate, at the conversion rate or loyalty, to the impressions..

And if we are talking about advertising, it is worth even more!

Yes, the latter is undoubtedly a field for creative people-you need a good deal of innovation and the ability to think outside the box to be able to stand out.

But unless you enjoy wasting resources at random, you also need to know whether what you are doing is bringing you the desired results or not. Because, ultimately, any marketing campaign aims to generate revenue. 

Do you agree?

So here's where one of the most important KPIs that you should know and monitor in this area comes into play: the ROAS, in English "Return On Advertising Spend", that is, the return on advertising spending.

Have you ever heard of them?

It is data that gives you a broader look at your promotional strategy and its effectiveness. In fact, it gives you a deeper view of not only what is driving conversions, but also the revenue those actions are generating.

Simply put, it helps you understand whether you are spending your money well and how you can do it in the best way.

As you say, do you really not know much about it or is it not completely clear to you?

It's your lucky day, because in this article you'll find everything you need to know about ROAS: what it is, why it's so critical and, most importantly, how you can calculate it.

What is ROAS

As I mentioned a moment ago, let's talk about metrics and specifically KPIs, which are the key performance indicators that let you know if you are moving in the right direction according to the goals set.

ROAS, among others, is a profitability index that measure the efficiency of your advertising investments: allows you to evaluate the effectiveness of a campaign (and thus the profit derived from it) against the expenses incurred in carrying it out.

It is a percentage figure that expresses the ratio of revenue generated by an ad to each euro spent on it.

Let's take a practical example right away.

Suppose you earned €800 in revenue from an advertising campaign of Facebook which cost you 100€: your return on advertising expenditure would be 8:1, which represents 8€ earned for every euro spent.

That way you can figure out which channels, tools and forms of investment work best and target your strategic advertising choices accordingly, improving your efforts - which is why it is a widely used metric in the digital marketing world.

It helps you answer a whole range of questions, such as:

• What is the relationship between my spending on paid ads and the sales generated with them?
• Do my ads generate conversions?
• Which ads convert well and which don't?
• For which ads do you need to eliminate keywords and for which ads do you need to increase the spend or CPC?

The idea is that the more effectively your advertising messages connect with your potential customers, the more revenue you will earn from each euro spent.

Knowing ROAS is an important part of any marketing campaign: if that figure meets or exceeds expectations, it is a good indicator that your strategy is paying off. On the other hand, a low return on ad spend is a sign that something is not working and needs to be reorganized.

What is the difference between ROAS and ROI?

Perhaps when talking about ROAS, a light bulb went on in your head and ROI (Return on Investment) came to mind, wondering if the two are related or even the same thing.

Let's make this clear right away.

ROAS and ROI may seem similar, as they are in both cases marketing metrics that evaluate the profit generated by an investment and tell you whether or not your campaign was successful.

However, they are two quite distinct KPIs, and I will explain why right away.

First of all, if you haven't done so yet, I recommend that you read the following. my article on ROI (you can also find the formula for calculating it there).

That said, ROI measures the total return on an investment based on the overall ratio of revenue to costs and is therefore a "broader" metric, we can say. 

Basically, it calculates how much you earn from advertising after expenses: this includes not only the cost of the ad itself, but any other resources involved such as IT, operational costs, design and distribution.

ROAS, on the other hand, is a specific metric that focuses solely on the profit generated by direct spending on an ad campaign. It does not take into account additional costs, only that incurred to place the ad and how much money you generated as a direct result.

Ultimately, this means that the only cost considered in a ROAS calculation is the cost of advertising. On the other hand, the cost of an entire project or campaign will be considered in an ROI calculation.

One interesting thing I would like to point out is that a negative ROI can still include a positive ROAS: your overall investment in a promotional campaign might be higher than the profit generated, but the return on individual ads might instead be positive for each.

Maybe then you'll ask: so to evaluate an investment in a marketing strategy, should I use ROI or ROAS?

Well, it is actually not an alternative decision: ROI you can best use to visualize long-term profitability and measure overall profits, while ROAS determines the extent to which a campaign contributes to those profits, and is most useful in optimizing for short-term strategies or very specific ones.

Let's say that in web marketing they are two complementary indicators, and using both ROI and ROAS formulas for each campaign is definitely a best practice. 

Why ROAS is important

Now, with all the metrics at your disposal, you might ask: Why bother with ROAS? Wouldn't tracking conversions or click-through rates be enough?

Well, the main reason is very simple: even if your campaign generated leads and quality conversions, producing a certain amount of revenue, if you paid more than you earned, you can't consider it a success.

Do you agree?

In addition to assessing the average return and financial return on your promotional efforts, ROAS is important for other reasons, including:

• It provides you with accurate data to support any increases in ad spending, changes to campaign budgets, and more;
• It is an effective way to identify areas where costs can be reduced;
• Determine which campaigns or types of ads are most profitable and have the highest return, so you can decide to reallocate spending to other forms and channels that will provide you with a better return;
• It can also be used to compare the cost-effectiveness of one marketing campaign versus another. For example, campaign "A" may generate twice as much increase in sales volume as campaign "B," but if the latter costs one-fifth of the former, then "B" is a more cost-effective investment;
• It allows you to have a baseline average to measure against for future calculations.

Without tracking return on ad spend (in addition to other metrics), you may end up making suboptimal decisions based on limited information.

Unless you are specifically focused on other types of goals (like, say, increasing the brand awareness) you should consider revenue as the ideal outcome of your campaigns. Without calculating and tracking ROAS, you won't be able to track performance in terms of revenue generation. And without that, you can't optimize them for success.

How to calculate ROAS: the formula

Very well, now that you're clear on what ROAS is and what you need it for, let's get to the key point: how can it be calculated?

Perhaps, now that you know how important it is, you might assume that it is a nuisance....

Instead, it is just the opposite: the ROAS formula is incredibly simple.

I'll show it to you right now:

ROAS = (revenue/costs) x 100

Where of course by revenues and costs I am referring to those generated by the advertising campaign you are considering.

Let's take a practical example right away: suppose you are running an advertising campaign in which you invest €1,000 and you can attribute €3,000 in revenue to those ads. Using the formula, it will be:

ROAS = (3000/1000) X 100

Thus determining a return of 3%, which is a very good result.

The important thing is that you get as accurate an estimate as possible of the money spent so that you can determine an equally truthful ROAS.

Conclusion

ROAS is a powerful advertising metric that helps you understand whether your paid campaigns are generating real, tangible results.

Of course, it is still useful to look at other data and other KPIs to get a complete picture of the return on investment.

What matters is the awareness on your part that Monitor and analyze performance and results is an important part of any marketing strategy, without which you risk sailing blind in an often stormy sea: only then can you in fact repeat what works and improve what needs to be changed.

What about you, are you currently tracking the return on ad spend for your campaigns? If so, what are you doing to improve this metric?

Let me know in the comments!