Growth Metrics Defined: ROAS

The wise person says… what you sow, so you shall reap, right? 

Not always. ROAS is the way to be sure.

Return on Ad Spend (ROAS) is a key metric in digital advertising that measures the revenue generated for every dollar spent on advertising.

Return on Ad Spend (ROAS) DEFINED v1

ROAS = Revenue Attributable to Ads / Cost of Ads

If your company invests $20,000 in media spend for Google Ads and gets $40,000 in revenue in return, you have a ROAS of 2. 

Note that most fractional CMOs prefer to fold in people costs into ROAS calculations. This allows for a fuller and more accurate picture of the overall efficiency of your marketing efforts. 

Include these numbers below if you want to include People Costs:

  • Vendors: these could be a creative agency or a media agency in charge of buying your ads on commission
  • Internal team: if you have an internal ad specialist setting up or managing the campaigns, you should include it. Remember tech and web development needed to build and maintain landing experiences. You might include fractional costs for team members who work occasionally on some aspect of the ads process.

If you do want to include People Costs, here’s how the formula looks:

Return on Ad Spend (ROAS) DEFINED v2

ROAS = Revenue Attributable to Ads / (Cost of Ads + People Costs)

How do I calculate ROAS?

It is simple to calculate ROAS with this formula.

Here’s an example of how to calculate ROAS using a fictional company in Atlanta called GoodCompany.

Here’s the facts:

  • GoodCompany launched three digital advertising campaigns:
    • $5,000 spent on Facebook/Instagram
    • $5,000 spent on LinkedIn
    • $5,000 spent on Google Ads
  • GoodCompany received attributable revenue of:
    • $5,000 from Facebook/Instagram
    • $25,000 from LinkedIn
    • $10,000 from Google Ads 

Overall, GoodCompany is getting a sustainable ROAS from its investment in media. However, not all the channels are performing the same.

Overall ROAS
($40,000 / $15,000) = 2.66

Facebook/Instagram ROAS
($5,000 / $5,000) = 1

LinkedIn ROAS
($25,000 / $5,000) = 5

Google Ads ROAS
($10,000 / $5,000) = 2

Based on these results, GoodCompany should test moving some of their budget from Facebook/Instagram campaigns and Google Ads campaigns over into LinkedIn campaigns.

However, most companies have holistic funnels, where customers will visit them and research them on different platforms. Some platforms and experiences are more conducive to browsing and research, others are great for discovery and others are better for ecommerce, for example.

This is why ending the budget on Facebook could be a mistake, because it might provide powerful support to other channels where conversions really happen. Careful research, heat maps and other tools can be used to learn more.

A fractional CMO will help your company measure ROAS accurately, report on it via live dashboards, and improve it over time to boost profitability.

What Is A Good ROAS?

A higher ROAS indicates your company has a more effective set of advertising campaigns.

A lower ROAS means you have room for improvement by digging into every aspect of your advertising advertising funnel.

A common benchmark for ROAS calculations is 3.5:1. This means that for every $1 you spend, you generate $3.50 in revenue.

That said, the appropriate ROAS benchmarks vary across industries and even across your campaigns. Before you launch an ad campaign, determine a target ROAS that is suitable to your business and industry. Then see if that target remains realistic or needs to be adjusted as traffic begins to flow.

How Can I Improve My Company’s ROAS?

Return on ad spend is a function of a huge number of moving parts, messaging ideas, images, money, people and systems. This provides endless opportunities for a fractional CMO to identify and fix issues that might be creating frictions along the way.

Here are strategies to improve your ROAS:

Understand Your Target Audience: Develop a deep understanding of your target audience. Tailor your ad messaging, creative, and targeting to resonate with the specific needs and preferences of your audience. Your fractional CMO will interview customers and develop specific personas, messaging matrixes and other information to allow your advertising specialists to make the right decisions and target correctly.

Segment Your Audience: Divide your audience into segments based on demographics, behavior, or other relevant factors. Create targeted ads for each segment to increase relevance and effectiveness.

Optimize Ad Creative: Create compelling and visually appealing ad creatives. Test different visuals, copy, and calls-to-action to identify what resonates best with your audience.

Use Relevant Keywords: For search engine advertising, use relevant keywords in your ad copy. Conduct keyword research to identify the terms your target audience is likely to use.

Optimize Landing Pages: Ensure that the landing pages your ads lead to are optimized for conversions. The content should align with the ad’s message, and the page should have a clear call-to-action.

Implement A/B Testing: Conduct A/B testing on different ad elements, such as headlines, images, and ad copy. Analyze the performance of variations and iterate based on what performs best.

Optimize Bidding Strategies with Machine Learning: Adjust your bidding strategies based on performance data. For example, you might increase bids for high-performing keywords or audiences and decrease bids for underperforming ones.

Leverage Retargeting and Programmatic: Implement retargeting campaigns to re-engage users who have visited your website but did not convert. Retargeting can be an effective way to bring back potential customers.

Monitor Your Ad Placement: Review the performance of your ads on different platforms and placements. Allocate more budget to placements that generate a higher return and consider excluding underperforming placements.

Optimize Ad Scheduling: Analyze when your target audience is most active and adjust your ad scheduling accordingly. This ensures that your ads are shown at times when they are most likely to be effective.

Improve Quality Scores: For platforms that use a Quality Score (such as Google Ads), focus on improving this score. Higher Quality Scores can lead to lower costs per click and better ad placements.

Diversify Your Ad Media Platforms: Consider diversifying your advertising efforts across different platforms. Each platform has its strengths, and diversification can help you reach a broader audience.

Track and Analyze Attribution Data: Use analytics tools to track and analyze the performance of your ads. Identify trends, patterns, and areas for improvement, and use data-driven insights to refine your strategy.

Set Realistic Goals: Set realistic and achievable ROAS goals based on your industry benchmarks and historical performance. Adjust your expectations as needed.

Experiment with New Ad Formats: Stay abreast of new ad formats and features offered by advertising platforms. Experimenting with new formats can help you stay ahead of the competition and reach your audience in innovative ways.

Measure What You Treasure: Getting More ROAS

Continuously monitor and adjust your advertising strategy based on performance data. Your company should maintain a real-time data dashboard showing ROAS spend calculations for every platform and overall combined results.

Remember that improving ROAS is an iterative process, and ongoing optimization is essential for sustained success.

FURTHER READING:
• What is return on ad spend (ROAS)? The definition of ROAS at Adjust
• What is ROAS? Calculating Return On Ad Spend at BigCommerce
• Return On Ad Spend (ROAS) Explained by Treasure Data
• Return on ad spend (ROAS) at AppsFlyer