Formula to Calculate ROAS
Advertising Spend divided by Gross Revenue from Ad campaign equals ROAS
Cost of Ad Campaign
Let’s plug in some numbers to give you a feel for how this equation actually works in the real world.
For example, a company spends $1,000 on an online advertising campaign in a single month.
In this month, the campaign results in revenue of $5,000. Therefore, the ROAS is a ratio of 5 to 1 (or 500 percent) as $5,000 divided by $1,000 = $5.
Revenue: $5,000
ROAS = $5 OR 5:1
Cost: $1000
For every dollar that the business spends on this specific advertising campaign, it generates $5 worth of revenue.
A ROAS of $5 is really good so obviously, this marketing campaign is working and the following month, the budget allocated to the campaign should be increased.
But Why Does ROAS Matter?
No one wants to spend money without making money. That’s not what business is about. Everyone understands that to make money, you have to spend money. Advertising is an investment, but you’re tossing money down a drain if you don’t know whether it’s working and generating new business.
ROAS clears it all up in a nice package for you. It allows you to evaluate the effectiveness of your ads. This number makes it obvious which ads are performing and which are not. Essentially, ROAS helps you to stop wasting money on campaigns that simply don’t work.
The insights from ROAS across all campaigns will help you design your future marketing budget, ad strategy, and overall brand growth.
You’ll want to always keep a watchful and analytical eye on ROAS, so you can make informed decisions on which campaigns to invest your ad dollars, and which campaigns to stop running entirely.
Other Factors To Consider
Of course, ROAS, for as helpful as it is, doesn’t include all associated costs with each campaign. That ROAS number is showing you how much you spent on the platform (Facebook, Google, TikTok, etc.) but it can’t know the additional costs required to create and run it effectively. Those figures you’ll need to add in yourself.
To calculate what it really costs to run an advertising campaign, you’ll need to include any of the following that relates to your business:
- Affiliate Commission
This is the portion of each sale that you have to pay out to affiliates for sending customers to your site. Make sure to include any network usage or transactions fees as well.
- New Subscribers
Oftentimes, marketers pay attention only to purchases – that quick money in the bank. But if you’re running a lead magnet in the exit popup of the page and 400 people sign up for it without making a purchase, you just earned 400 new subscribers to your email list. How much is each email subscriber worth to your business over time? Consider that as well when you’re factoring ROAS.
- Agency Costs
Unless you’re managing your digital advertising campaigns yourself, you’ll likely have costs associated with your advertising management provider. Oftentimes this is a flat monthly fee followed by a percentage of monthly ad spend. Don’t forget to include these associated costs as well.
What's A Good ROAS?
There’s no right answer to this question, as there are too many variables to include for a generalized number.
You’ll need to include factors like profit margins, operating expenses, new email subscribers, brand awareness, and the overall health of the business.
While there’s no “right” answer, a common ROAS benchmark is a 4:1 ratio. This is what most marketing campaigns hope to achieve.
$4 revenue on every dollar in ad spend.
Of course, if your business is strapped for cash, you’ll probably require a higher ROAS.
If you’re a well financed start-up with the goal to make your brand a household name before going public, a lower ROAS is acceptable.
There are some businesses that need a ROAS of as high as 10:1 to be profitable. While others with lower expenses can achieve respectable growth at only 3:1.
Truly, it comes down to profit margin, overall strategic goal of the marketing campaign itself, and total business expenditures.
The business with a low margin can survive a low ROAS, whereas smaller margins require the business must maintain lower advertising costs.
For most ecommerce stores, a high ROAS is usually required due to the nature of the business, higher overall expenses, and higher distribution and fulfillment costs.
