Return on Ad Spend (ROAS) 101

Once upon a time, advertisers made TV spots, aired them, got audience numbers, and… guesstimated the ad’s impact on driving actions or sales. Digital marketing and its ability to collect data on just about every consumer action turned what was previously a guessing game into a measuring game. Today, marketers can evaluate and optimize performance data including ROI, CTR, CPC, and conversion rate. And just when you thought all that was enough, we’re here to tell you that it’s not.

While ROI does provide insight into how well a campaign has performed, it tends to be too broad. Click-through rates inform how many people clicked an ad, but not how many people have made a purchase. Conversions can potentially lead to profit, but what if the intended action is to download or subscribe to an email distribution list? Individually, these metrics don’t tell us much, but together they help provide some clarity, but if you are looking to get the full picture, we’d like to introduce you to Return on Ad Spend, otherwise known as ROAS a must-have metric for digital marketers everywhere.

What does all of that mean anyway? How do you track return on ad spend? Why does tracking ROAS even matter? And most importantly: Can you improve it?

Advertising is an investment, and it's important to understand if your investment is yielding any profit. ROAS, Return on Ad Spend, measures the amount of revenue earned for every dollar spent on advertising – basically it measures how effectively you are investing your marketing dollars. But what does ROAS tell us? It is measured as a ratio, so, for example, if your ROAS is 3:1, you’re generating $3 in revenue for every $1 spent on advertising.

When it comes to mobile marketing, return on ad spend is a core KPI to utilize when measuring the efficiency of a campaign. Ultimately, as is the case with calculating return on investment (ROI) the higher the number the better! When calculating the success of a mobile marketing campaign there are a few other KPIs that should be monitored as well, including retention rate, average revenue per user/average revenue per daily active user (ARPU/ARPDAU), and lifetime value (LTV).

Why Return on Ad Spend Matters

Although it may seem an extra step on top of the dozen other metrics you are likely tracking, there is good reason to track and measure ROAS. Essentially, this metric, especially in the case of an advertising campaign, can quantify the performance of the campaign’s bottom line. Ecommerce companies should pay close attention to this metric as it is key to making informed decisions on their ad investment and its effectiveness.

Since ROAS helps you understand what is working and what isn’t when it comes to your advertising strategy, this insight allows you to make better decisions that will hopefully further drive revenue.

How to Track ROAS

Now that we have a base understanding, let’s discuss how to track return on ad spend, which does require a bit of prep work. You must be sure that your conversion tracking is set up correctly to properly record the value of each sale. It is crucial to know where your users are coming from, how they interact with your ads, and how they behave. This is not always a simple feat, but tracking your conversions, and connecting them to key actions in their journey toward becoming a customer will help you understand where and how to spend your advertising dollars.

Keep in mind that in order to be successful, you need to know your breakeven point as well. This means you also need to know how much revenue you’ve generated, the cost of goods sold, any fees associated with your sale, and your profit per sale. These metrics will provide you with a sense of what the minimum requirements are for your campaign to be considered successful. Remember, if your data isn't accurate, your findings won't be either.

How to Calculate ROAS

Calculating ROAS for a campaign is straightforward—you simply divide the revenue generated by the cost of the campaign. The formula should look something like this:

Gross revenue from ad campaign / Ad campaign costs = ROAS

For example, if your campaign has generated $1,000 in revenue, and you have spent $100 in advertising, you would divide the two numbers (per our formula above) which equal 10. Meaning, for every dollar spent on this campaign, you generated $10 in revenue. Seems simple enough, right? However, there is a bit more to consider when calculating ROAS that goes beyond the aforementioned formula.

Costs to Consider When Calculating ROAS

While the formula to calculate return on ad spend may seem simple, tracking the costs associated with the ad may not be so. What costs should you be considering when calculating an accurate ROAS? The first cost is your actual ad spend, but don’t forget to include the less obvious expenditures such as:

Partners / Vendors:
- Be sure to accurately determine any fees, costs, or commissions associated with partners or vendors that assist in your campaign.
Costs of Labor:
- The cost associated with any in-house resources and personnel that play a role in executing your advertising efforts. This can include copywriters, graphic designers, media planners, and buyers.
Tools:
- Don’t forget to account for specific platforms, software, or tools utilized in order to launch your campaign.

Taking the time to account for all these costs is crucial to calculating an accurate ROAS.

The results could surprise you by revealing that a campaign you thought was working isn’t, or that one you weren’t betting on was driving big returns. Remember, if your data isn't accurate, your findings won't be either.

How is ROAS different from ROI?

If you find yourself thinking ROAS seems familiar, it's because it's very similar to how you may be calculating overall return on investment. There is a key difference, when calculating ROI, you are looking at whether an entire project was successful. This can be impacted by multiple factors such as the cost of goods sold. ROAS is more granular, focusing on advertising costs specifically—this is a much more effective metric when considering how and where to spend your advertising dollars.

So, if this metric is so great, should you consider it the ‘end-all-be-all’ when measuring campaign performance? Well, let’s take a deeper look at ROAS in comparison to other metrics.

ROAS vs. Click-through rate (CTR)
- On its own, CTR is not necessarily as powerful as it seems on the surface. Simply understanding how many people click on your ad does not tell you whether or not you’ve generated any revenue. However, pairing ROAS with click-through rate can provide a much deeper understanding of your campaign. For example, if you’ve generated 1,000 clicks, but your ROAS for the campaign is 2:1, this tells you that users are interested in your ad, however, they are not converting. This should trigger you to review and question certain elements of your campaign, including your targeting tactics or your conversion path.
ROAS vs. Conversion rate
- You shouldn’t necessarily track conversions over ROAS or vice versa, as these two metrics are telling you two different things. Conversion rate measures user actions, not dollars generated. Think of it this way: if your conversion path is directed toward generating email sign-ups or downloading a piece of content, what does that mean in terms of dollars? Return on ad spend measures revenue generated, not just conversions. For this reason, in order to get the full picture, you should measure both!
ROAS vs. Cost per action (CPA)
- CPA tracks your average cost per conversion. This is a great metric to understand your baseline costs for all conversions. However, CPA does not tell the complete story, as not all conversions are equal. To understand this, consider two different ads each costing $100 and leading to a conversion, ad A yields a customer that spends $5, and ad B yields a customer that spends $500. Clearly, ad B was much more effective. This is where our good friend ROAS comes in, by considering revenue generation you can now focus on what happens after conversion.

Any metric on its own can’t provide the full picture of your advertising efforts. Return on ad spend needs to be considered alongside your other metrics to help understand what is working, and if things are not working to help narrow down where in your conversion path you should focus. So, we know that spending less is great, but what is a good ROAS anyway?

What is a Good Benchmark for ROAS?

The question may be a bit more complicated to answer. As is the case, with many of the metrics you are currently monitoring for your campaigns, there is no definitive ‘good’ or ‘bad’ ROAS. What a good ROAS is can vary across campaigns, industries, or even your individual goals; however, if you are looking for a general target benchmark, a ROAS of 4:1 is often a good indicator of a successful campaign.

Here's a good rule of thumb to follow:

3:1 or below is cause for alarm and you should review your campaign, landing page, targeting, and costs.
4:1 is a good indicator of campaign success.
5:1 or above likely means you are generating profit!

My ROAS is Low...What am I doing wrong?

What a good ROAS is may have a flexible answer (as discussed above), so there may be times where your ROAS seems low, but this does not necessarily call for panic. Your first step should always be to review your costs and ensure that you are capturing them accurately. Once done, if you have made any changes to your costs, recalculate your ROAS before making any decisions on the next steps.

In certain circumstances, a ‘low’ ROAS may even be ok. For example:

New Brand:
- If you are working on launching a new brand, a low ROAS is not necessarily a cause for concern. Keep in mind that your brand will require time to gain traction. The goal here is to see continued improvements over time.
New Market:
- Similarly, when launching a new brand, if you are targeting a new market you may end up with a low number. Again, monitor this over time with the goal being to see improvement as you gain traction.
Campaign Goals:
- Keep your campaign goals in mind when evaluating your ROAS. For example, if the primary KPI of your campaign is brand awareness, a lower return on ad spend should be expected and is not fully indicative of performance.

How to Optimize ROAS?

Now that we’ve discussed potential times when a low ROAS is ok, here are steps you can take to improve your ROAS.

Improving the digital experience
- Are your ads past their shelf life? Is the imagery you’re utilizing lackluster or uninteresting? Simply keeping their attention with proper ad messaging and creativity is a gap many brands and marketers may be overlooking. The key in cutting through the noise of your competition may be as simple as creating an engaging and vibrant creative!

Landing page and campaign optimization
- A vital step, but often overlooked is to review your campaign. Ensure that your ad is on brand and captures users’ attention. Review your landing page, ensure that it offers a friendly user experience and is easy to navigate. You want to make purchasing your product or contacting your team to be fast, reliable, and easy. It should go without saying, but make sure to test the mobile-friendliness of your site, and don’t forget to A/B test!
Review your attribution model
- There are many attribution models when it comes to advertising—first touch, last touch, and multi-touch. The default model is often “last click” attribution. However, this may not necessarily be right for your campaign. First or last click models can impact ROAS and even make successful campaigns seem like they are underperforming.
Lower your cost of advertising
- What this looks like will vary depending on your business but considering that the cost of advertising largely contributes to your ROAS, this is a great place to look. Reducing your cost of advertising can come in a few forms. To start, can you reduce the time spent on ad management? Another potential cost-savings involves reviewing your targeting to ensure that you are not wasting any money on the wrong audience. You’d be surprised how much you can save by narrowing down your targeting to ensure you are only reaching those that are most likely to engage.
Improve your revenue
- If, for whatever reason, you cannot reduce the cost of your ads, improving the revenue you are generating can boost your ROAS. Be sure to monitor ROAS alongside your other key metrics. For example, if you have a high CTR but a low ROAS, you may have an issue with your landing page or conversion path. By improving your conversions, you can potentially increase the revenue you’re generating and improve ROAS.

Data. It’s a double-edged sword for digital marketers with nearly everything being trackable/measurable. Data is great when it comes to measuring and evaluating the success of marketing efforts—click-through rate, cost per click, conversion rate, ROI, attribution. However, the ability to track all these actions can often keep marketers from seeing the bigger picture when determining a campaign’s success. You can’t see the forest for the trees.

There is value in raising awareness, which is not always measurable. Think of the billboards, videos, and (of course) the Super Bowl ads, that stick with you because they made you laugh. Those LOL moments and the actions they inspire down the road can be as valuable to measuring ad effectiveness as CTRs, ROIs, and ROASs.