Return On Advertising Spend, (ROAS), is a marketing metric that measures the efficacy of a digital advertising campaign. ROAS helps online businesses evaluate which methods are working and how they can improve future advertising efforts.
The definition of ROAS
Return on ad spend (ROAS) is an important key performance indicator (KPI) in online and mobile marketing. It refers to the amount of revenue that is earned for every dollar spent on a campaign. Based on the return on investment (ROI) principle, it shows the profit achieved for each advertising expense and can be measured both on a high level and on a more granular basis. Whether you want to measure ROAS for an entire marketing strategy or look at performance at the campaign, targeting, or ad level, it’s a key metric for measuring and determining strategic success in mobile advertising.
How to calculate return on ad spend (ROAS)
ROAS can be calculated with a simple formula:
ROAS = (revenue attributable to ads / cost of ads) x 100
Think about it this way: Let’s say you’re running an ad campaign that you invest $1000 into, and you are able to attribute $3000 in revenue to those ads. Using the ROAS formula, you can determine an ROAS of 3, which is a very good result.
Calculating ROAS becomes a little bit more complicated when determining what the cost of ads is, and there are a couple of decisions to be made. Firstly, you need to determine whether you want to track the dollar amount spent on a specific platform, or if you want to bundle extra advertising costs in. For example:
Vendor costs: Vendors you work with will most likely take commission fees for running the ad campaign.
Team costs: You need to pay a person to set-up and manage the campaigns, whether they’re in-house or at an agency.
Why Return On Ad Spend matters
ROAS is essential for quantitatively evaluating the performance of ad campaigns and how they contribute to an online store’s bottom line. Combined with customer lifetime value, insights from ROAS across all campaigns inform future budgets, strategy, and overall marketing direction. By keeping careful tabs on ROAS, ecommerce companies can make informed decisions on where to invest their ad dollars and how they can become more efficient.
What is the difference between ROAS and ROI?
As covered above, ROAS refers to return on ad spend, while ROI refers to return on investment. When calculating an ROI, you’re looking at measuring the return on a particular investment relative to what the cost of that investment was. It’s a calculation of your net profit and the investment, with a formula that generally looks like this:
ROI = (Net profit / net investment) x 100
While similar but not the same, ROAS aims to help advertisers and marketers determine the overall efficiency of online or mobile marketing campaigns by calculating the exact amount of money that is earnt from a campaign relative to the exact amount of money that was invested into it. One important takeaway is that a negative ROI can still be a positive ROAS, because your overall investment might be higher than the profit generated, but relative to the investment in the advertising campaigns themselves (depending on how you calculate that), the ROAS itself can be positive.
Should I use ROI or ROAS?
When creating a campaign or marketing strategy, ROI vs. ROAS is not an either/or decision. ROIs are best leveraged to help gain visibility over long-term profitability, and ROAS might be more helpful in optimizing for short-term or very specific strategies. When building out a high-level mobile marketing campaign or strategy, utilizing both ROI and ROAS formulas is a best practice. Within mobile marketing, ROI and ROAS are both crucial metrics for marketers and advertisers to work with. Whereas ROI can be applied high-level to measure overall profits, ROAS will help you determine how much a campaign is contributing to those overall profits.
FAQs
What is ROAS?
ROAS stands for Return on Ad Spend. It is a marketing metric used to measure the revenue generated for every dollar spent on advertising.
How is ROAS calculated?
ROAS is calculated by dividing the revenue generated from advertising by the cost of the advertising campaign. The formula is: ROAS = Revenue from Ads / Cost of Ads.
What's the difference between ROAS and ROI?
While both metrics measure the effectiveness of an investment, ROI (Return on Investment) takes into account all costs associated with an investment, not just advertising costs. ROAS specifically focuses on revenue generated from advertising spend.
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