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What is Return On Ad Spend (ROAS)? 

Written by

Emmanuel O.

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Andrew Strassmore

Fact checked by

Artem Goryushin

Updated: May 10, 2023

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Return On Ad Spend (ROAS)

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Definition

Return on ad spend, or ROAS, is a marketing term that gauges how much your company makes for every dollar spent on advertising. ROAS, at its most basic level, analyzes the efficacy of your advertising efforts; the better your advertising messages resonate with your target audience, the more money you’ll make from each dollar spent on advertising. The higher your ROAS, the better for your business. 

With requisite knowledge, you can measure ROAS in your Google Ads account at various levels, including account, campaign, ad group, etc. You can calculate ROAS as long as you know your current spending and income levels.

Understanding ROAS

The idea of business and its promotions through targeted advertising campaigns have roots in the last century of human existence. A very popular example is the kraft introduction of a “salad dressing cream” during the tail end of the great depression in 1933. Despite the difficult economic conditions, they initiated one of the greatest marketing campaigns for food products, making the brand become an American best-selling in six months. 

In his 2009 New Yorker article “Hanging Tough,” James Surowiecki said the success of the Kraft advertising innovation in a recession-induced economy surprised a lot of marketers for decades. James noted in his conclusion that when it comes to making critical decisions on a company’s growth, there are always two options to pick from; the decision to take a risky bet that could sink the boat or the choice of missing an opportunity to gain a major market share. 

Businesses have also been in situations where they will have to decide on spending more while others are spending less or become defensive while others are becoming offensive. And in helping them answer these subjective questions without incurring devastating consequences for their business, this business often uses the return on ad spend (ROAS) as the metric for making the right choice.

The return on ad spend (ROAS) metric, which is also based on the return on investment (ROI) principle, is a crucial key performance indicator (KPI) in online and mobile marketing. It may be assessed at a high level and in explicit detail. It displays the profit made for each advertising expense. 

It’s a key indicator for monitoring and assessing the strategic success of mobile advertising, regardless of whether you want to evaluate performance at the campaign, targeting, or ad level.

Technically, If you spend $10 on advertising and generate $100, your return on ad spend (ROAS) for that campaign is 10x, or 10:1.

Differences Between ROI and ROAS 

Both ROAS and ROI can be used by businesses to assess the effectiveness of their advertising campaigns. Still, some key distinctions between the two should be considered when creating an investment or advertising plan. The following are five key distinctions between ROAS and ROI:

Type of investment 

Businesses can use both to evaluate the same expenditures, but ROAS focuses on gauging the effectiveness of spending on advertising and marketing. In contrast, ROI focuses on determining the success rate of any expenditure, including marketing and advertising initiatives. ROI can be used to assess the overall profitability of a campaign.

General and specific application 

ROI has a broad application spectrum, which is why it can be used to measure the viability of different businesses. The ROAS, on the other hand, has a specific application spectrum because it focuses on ad spending and doesn’t translate to other types of organizational ad spending. 

Profits evaluation

The ROAS focuses on only the total profits and expenditures made on a particular campaign, while the ROI evaluates the entire profitability status of a company after deducting all expenses. 

Reliability 

The ROI and ROAS are both useful metrics for decision-making. Still, the outcome of the ROI is usually taken more seriously because it determines if the business should stop or continue operations. 

Companies often compare ROI to ROAS to better understand overall profitability. 

Necessity 

A company’s finances are also represented and impacted differently by ROI and ROAS. Since spending on advertising enables businesses to draw in new clients and enhance brand recognition, many firms view ROAS as an essential cost of doing business.

Organizations can use ROI to identify how to leverage their investments to boost their profitability gradually. Investments can serve various functions, and some can be more profitable than others.

Some businesses, for instance, make investments to reduce costs, but others make investments to boost production.

How to calculate ROAS 

To calculate ROAS, you can use the following formula

ROAS = Revenue from ad/Cost of an ad campaign 

For example, if you spend $3,000 on an ad campaign and make $7,000 as profit, your ROAS would be 233% (100% is the break-even point).

$3,000/$7000= 2.333 

2.333×100%= 233%

Of course, there are instances where the ROAS is negative, such as when you spend $1,000 on advertising but only make $500 in profits. Your ROAS in this scenario would be 50%. If your ROAS turned out to be negative, now would be an excellent opportunity to review your creatives and marketing strategies, identify the root of the issue, and make any necessary adjustments.

Six ways to Enhance Your ROAS 

Lower the cost of your ad 

Even though it might seem apparent, cutting back on expenses is one strategy to increase the return on your investment. Improving your quality score will help you achieve this. A lower 

Cost per click (CPC) results from higher-ranked advertising and a higher quality score.

Negative keywords are another technique to weed out users seeking something similar to what you’re advertising but not that precise.

Set “reasonable” benchmarks 

You must first establish what constitutes a benchmark for good ROAS to know what your target should be. Knowing the starting point for each campaign and channel can help you identify areas where you have succeeded and use those areas as a guide for upcoming campaigns.

Re-engage high-value customers to boost sales 

If done on owned channels, re-engagement is much cheaper than user acquisition and free. 

It’s important to re-engage and persuade customers to make repeat purchases if you have a cohort of users who may have produced a high ROAS in the past. 

A limited-time offer is one approach to accomplish this. They will consequently feel like valued customers who are also getting fantastic offers.

Test and optimize 

Testing which campaigns, creatives, and channels produce the best results and most valuable users is crucial because achieving a good ROAS will depend on several variables. 

If you notice that something isn’t producing a high or positive ROAS, then it’s time to either optimize and fix the problem or end the campaign entirely.

Deploy predictive analytics 

With ROAS optimization, knowing how your most valued users monetize during their time using the app can be a game changer. 

Your ROAS can significantly increase if you link the early funnel actions to subsequent monetization.

Make MORE Ads 

Even though it appears counterintuitive, this strategy is more effective than you might realize. For the same price as a single traditional “TV” style campaign, your brand can experiment with multiple visual styles, placements, or audiences when it builds content that scales from the start. 

This allows you to quickly see what works and what doesn’t, determining which creative is connecting and what needs to be “switched off.”

Conclusion 

One of the most trustworthy measures for assessing whether your online marketing is accomplishing its intended goal of raising your Revenue is ROAS. It’s a relatively easy metric, and the knowledge you gain from it can help you transform a business that’s barely making ends meet into one that’s extremely profitable.

Related articles:

What is Return On Investment (ROI)? What is The Average Order Value (AOV)? What is Customer Lifetime Value (CLV)? What is Customer Acquisition Cost (CAC)?

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