ROAS (return on ad spend) is a marketing metric that measures how much your business earns in revenue for every dollar spent on marketing or advertising.
While ROAS is similar to ROI (return on investment), ROAS looks specifically at the cost of an ad campaign, versus the overall investment that might be counted in ROI.
At its core, ROAS measures how effectively you are spending your marketing dollars.
So, if your ROAS is 5:1, that means you are making $5 in revenue for every $1 you spend on advertising.
How do you determine your ROAS? Let’s talk numbers.
Marketing effectiveness is all about numbers — ROI, CTR, response rates, conversions, and CPA all top the list when it comes to determining whether a campaign is successful.
But, those numbers don’t look at the whole picture.
Well, ROI does, but it tends to be too broad. Click-through rate tells you how many people clicked — but not how many bought. Conversions can lead to profit, but they could also be downloads or email sign-ups.
And those numbers can be useful. But, if you aren’t tracking ROAS in addition to other numbers, there’s a good chance you are making decisions based on limited information.
So, what is ROAS, why does it matter and — most importantly — how do you improve it?
That is what we’re going to cover today.
How Do I Calculate ROAS (Return on Ad Spend)?
The equation to calculate ROAS is pretty simple, though the numbers that go in can muddy things up a bit — first, let’s talk about how to calculate ROAS, then we can dig into making sure those numbers are accurate.
The equation for ROAS is:
This equation gives you a ratio that can be used to determine whether or not a marketing campaign is working. For example, if a campaign generates $10,000 in revenue and costs $200, then your ROAS is 5:1.
Does that equation look a bit familiar? You might notice it’s very similar to the equation used to calculate overall ROI.
ROAS and ROI aren’t exactly the same, however.
So, how is ROAS different from ROI?
ROI tends to look at the big picture, such as whether an entire project was successful. It can be impacted by, for example, the cost of goods for an eCommerce business or lack of profit margin.
ROAS, on the other hand, is more granular. It looks at specific ads, campaigns, or initiatives and only considers advertising costs.
This can make it a more effective metric when you are deciding where to spend advertising dollars.
What Numbers Should Be Considered when Calculating an Accurate ROAS?
If you want to gain an accurate insight into the effectiveness of your campaigns using ROAS, you need to make sure you are considering all your ad costs.
Clearly, you would include the actual ad spend, but what other costs should be included when calculating your ROAS?
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Don’t forget to consider less obvious advertising costs such as:
- Vendor Costs: Fees and commissions from partners and vendors that assist in your campaign.
- Salary Costs: The cost of in-house advertising personnel who assisted in the campaign.
- Affiliate Commission: This should include both commissions as well as network transaction fees.
If these costs are not accurately counted, your ROAS will be inaccurate, which could result in wasting spend on a campaign that is not effective — or even canceling a campaign that was performing well.
What is a good average ROAS?
There is no single ‘good’ ROAS. A good ROAS can vary by campaign, industry, or even marketing goals. There are even some cases where a lower ROAS might not be a bad thing.
However, in general, a ROAS of 4:1 or higher indicates a successful campaign.
Keep in mind that the accuracy of ROAS is highly dependent on getting accurate numbers for cost and total revenue generated. If you have a low ROAS, your first step should be to make sure you are attributing revenue correctly.
When is a lower ROAS okay?
A lower ROAS might not indicate a failing campaign in several situations. For example, if you are using banner ads which tend to have low click-through rates, but are effective at increasing brand awareness, your ROAS might be lower.
Or, if you are working to take over a new market, a low ROAS might be okay as your brand works to gain traction.
In general, however, a ROAS at or below 3:1 should give you pause. It may be time to reevaluate how the metric is calculated or shift gears with your advertising.
Why Does It Matter?
For such a simple equation, ROAS can definitely get complicated.
You might be thinking, “This sounds like too much effort, and I’ll probably get it wrong.”
With so many different metrics to measure, does it ROAS matter?
Could you just track your click-through rate or conversion rate instead? Yes, you could.
But you might be missing out on critical data about your paid campaigns by ignoring ROAS.
Here’s the thing — advertising is about making sales, not just driving traffic or earning clicks. Traffic and clicks are good — but revenue is what really matters at the end of the day.
If you can’t turn traffic into revenue, something is wrong.
ROAS provides a deeper insight into what is working for ads, ad groups, or ad campaigns so you can make informed decisions about what to keep doing and what strategies it is time to drop.
Is Return on Ad Spend Better Than Click-Through Rate?
ROAS offers a more granular look at your advertising efforts than click-through rates. Click through rates only tell you how many folks clicked on an ad — not whether they made your business any money. Together, CTR and ROAS can provide a deeper understanding of your campaign.
So one isn’t really better than the other.
For example, if you get 1,000 clicks on an ad, but your ROAS is 2:1, then you know the ad is generating clicks, but the customers are not converting. It might be time to look at your landing page, ad relevance, or conversion path.
Should I Track ROAS Over Conversion Rate?
You shouldn’t necessarily track ROAS instead of conversions. These two metrics look at different things.
Conversion rate measures action, not necessarily revenue.
For example, a free white paper landing page might have a conversion rate of 45% — but what does that mean in dollars? ROAS looks at revenue, not just conversions like downloads, clicks, or email addresses.
Ideally, you should track both.
What Can ROAS Tell Me About My Ads?
On its own, ROAS doesn’t provide actionable data — for that; it needs to be considered alongside other metrics to pinpoint where in the conversion process things are going wrong.
For example, let’s say you have an eCommerce store and are running a Google Shopping campaign for tennis shoes. It is a pretty competitive niche, with the likes of Zappos and DSW, and can be difficult to generate sales.
You create a shopping ad, let it run for a few days, and now it’s time to see whether it is working. There are several ways to measure your Google shopping campaign, including:
Let’s say you have a low ROAS, but a high conversion rate for the Nike product page. This could mean your product might be priced too low — or that your bid strategy may be focused on the wrong key terms. (There could, of course, be several other issues, since this is a hypothetical campaign!)
But a low ROAS alone only tells you the campaign isn’t effective.
A high conversion rate is a good thing, usually. But not if you are spending too much.
ROAS does not provide pass/fail metrics for your ad campaign; rather, it tells you the return on your advertising spend and context so you can dig in further.
How to Improve your Return on Ad Spend
What do you do when an ad’s ROAS is low? Don’t pause those ads just yet. Here are a few steps to take first.
If a campaign has a ROAS below 3:1, it is time for a deeper look at targeting, your ROAS accuracy, and the cost of your ads.
#1 – Review Its Accuracy
If your ROAS isn’t accurate, you could end up canceling a highly competitive campaign for no reason.
The first step when you face a low ROAS is to review your metrics. Are you considering all the costs of your advertising? What Google Ads attribution model are you using?
First or last-click attribution models can impact ROAS, making a successful campaign look unsuccessful. Make sure you are using an attribution model that makes sense for your campaign.
Are you including costs outside of your advertising costs? These costs could skew your ROAS.
#2 – Lower the Cost of Your Ads
ROAS includes two metrics – the cost of ads and your revenue. If you can lower your ad cost, you can drastically improve your ROAS.
What this looks like will vary based on your business, who manages your ads, and what types of ads you are running. However, here are a few factors to look at when working to lower the cost of ads.
- Reduce Time Spent on Ad Management: If you are using an ad management company, you could bring it in-house. If your in-house folks are struggling and spending too much time, it might be time to outsource.
- Review Negative Keywords: See if you are wasting ad spend on terms you don’t want to target. The average Google Ads account wastes up to 76% of its budget on the wrong keywords.
- Improve Quality Score: Google’s Quality Score is a metric that measures quality and whether an ad is relevant for the keywords it is targeting. A better Quality Score results in a higher ad ranking, which can drastically improve revenue and reduce wasted ad spend. Check out this guide to learn more about how to improve your quality score.
#3 – Improve the Revenue Generated by Ads
The second metric in ROAS is revenue. If you’ve done everything you can to reduce the cost of your ads, it’s time to look for ways to improve the revenue generated from your ads. Make sure to consider ROAS alongside other metrics like CTR and CPC to see where your ads are going wrong. Then, try these strategies to improve your ROAS.
- Optimize Landing Pages: If an ad has a high CTR and a low ROAS, the issue might be your landing pages. Make sure to use similar language on both the ad and the landing page, lead with a strong CTA, and take these other steps to optimize your landing page.
- Rethink your Keywords: Are you targeting the right keywords? If ROAS is low, restart your keyword research. Consider keywords with less competition where your ads can gain traction.
- Automate bidding: If you are running Google ads, you might want to consider using Google’s automated bidding features. You can set a target ROAS.
There is no one-size-fits-all approach to improving ROAS. Using the metrics alongside other metrics you are tracking will help you figure out where your ad spend is going wrong.
It might be your ad, your conversion path, keywords, or any number of other factors. The tips above, however, will get you started on the right path.
Final Thoughts
ROAS (return on ad spend) is a powerful advertising metric, but it doesn’t exist in a vacuum. The true value of ROAS lies in its ability to provide a more detailed insight when considered alongside other metrics you are likely already tracking.
Most marketers wouldn’t dream of buying a $10 spatula online without reading the reviews and comparing prices. Yet, too many companies are relying on just part of the picture when making advertising decisions that could cost thousands — or tens of thousands — of dollars.
Keep in mind that campaigns with a high ROAS could still lose money if you are wasting money on non-advertising related costs like overhead.
For example, if a campaign has a 10:1 ROAS, but shipping costs eat up the total revenue, you might still lose out on profit.
It is helpful to consider ROAS inline with other metrics, such as CTR, that can help you determine whether a specific advertising campaign is profitable—sooner as opposed to later.