Pay-per-click advertising such as Google Adwords and Facebook Advertising are great ways to drive volumes of highly relevant traffic to your website, but they are also one of the fastest ways a company can haemorrhage cash if not kept in check.
ROAS (Return On Advertising Spend) is a vital metric that shows how well your ad budget turns into revenue.
Let’s break down why ROAS matters, how to figure it out, and how it can shape a winning ad strategy.
Understanding ROAS: What It Is and Why It Matters
ROAS stands for Return on Ad Spend. It checks how much money you make for every pound or dollar you spend on ads. Unlike overall Return on Investment (ROI), which looks at the whole business, ROAS focusses on ad efficiency. It’s a must-have tool for marketers deciding where to invest ad spend for the best results.
By keeping an eye on ROAS, businesses can spot the best channels and campaigns. This means better decisions, improved strategies, and greater financial outcomes.
Calculating ROAS: The Formula Explained
Calculating ROAS is easy.
Let’s say you spend £5000 on advertising and you make £15,000 in sales. Your calculation for ROAS would be as follows:-
15,000 (Advert Revenue) / 5,000 (Ad Spend) = 3
We then multiply 3 by 100 to get a percentage, so 3 x 100 = 300
So your ROAS is 300%
A ROAS of 300% means you get £3 for every £1 spent on ads.
Break Even ROAS: How to Calculate It
To stay smart with your ad spending, know your break-even point. Break-even ROAS is 100%, which means revenue matches ad costs.
The calculation is exactly the same as the calculation above Ad Revenue / Ad Spend x 100 = ROAS%
Dipping below 100% ROAS means you are losing money to your advertising. While you may have contributed slightly to building brand awareness, most companies can’t sustain an adverting loss for long.
What is Considered a Good ROAS? Setting Benchmarks
A “good” ROAS can vary based on industry, goals, and profit margins. Generally, a 4:1 or 400% ROAS is solid, meaning £4 for every £1 spent. But success depends on several things:
- Profit Margins: Higher margins allow for lower ROAS.
- Business Goals: Companies focused on growth might prioritise expansion therefore brand building is important.
- Lifetime Value: If you can predict the lifetime value of a customer, then running ads at a loss can still be a profitable longterm strategy.
Setting the right benchmarks for your business ensures smart ad investments. Fine-tuning your ROAS approach helps you turn ad data into actionable insights. A higher ROAS improves profit margins, making it crucial to continuously refine your strategies.
How can ROAS be improved?
Having a website that allows you to carry out various CRO activities is the best way to improve your ROAS, but you can also look at things such as:-
- Increase the order value
- Reduce you advertising spend
- Improve your advertising targeting
- Gather emails from traffic where possible to reduce your overall acquisition costs
