ROAS stands for “return on ad spend,” which is the amount of revenue generated from each dollar spent on an advertising or marketing campaign. While return on investment (ROI) can be applied to an entire marketing strategy, ROAS focuses on one specific campaign at a time.
How to Calculate ROAS
Some advertising channels, like Facebook, can automatically calculate ROAS for you, but you should still know how to do it if you’re using other channels, as well as for determining what an optimal ROAS is for your business.
To calculate ROAS, simply divide the amount of revenue an ad campaign generated by the cost of the ads. If you had $5,000 in sales due to an ad campaign and it cost you $1,000 for those ads, then the cost per dollar would be $5,000 divided by $1,000, or $5, giving you a ROAS ratio of 5:1.
ROAS as the Great Equalizer
Organizing ads in different campaigns makes it extremely easy to compare one ad or ad set to another using ROAS. The costs of ads, and the results of those ads, varies widely from one channel to another, as well as within the same channel when you’re using different types of ads, or targeting different segments of your audience. How you define each campaign is up to you. It could be for one specific ad on one channel, or a group of ads in one campaign.
The number of variables you can find between ads is nearly unlimited. Some different common variables include the following:
Costs between channels
Costs between different audience segments
Costs based on keywords
Revenue amounts based on multiple purchases
Revenue amounts based on ad offers, like free shipping or discounts
When you use ROAS, you can bypass all of these variables. If you spent $500 on one campaign and brought in $2,000, then the ROAS ratio is 1:4. If another campaign cost you $800 and brought in $3,000, then the ROAS ratio is 1:3.75, making it less effective than the first campaign.
Revenue vs. Profits
Unlike the Fibonacci sequence, ROAS provides no “golden ROAS ratio” that fits ig database every company, or even one that fits every scenario for one company. A 5:1 ratio may be great for one company, but could be disastrous for another.
One of the main reasons for this is that ROAS, by itself, doesn’t take into account profit margins. If your company operates at a 20% profit margin across the board, it’s easy to determine what ROAS ratio is acceptable. If your company works with varied margins, which is extremely common for eCommerce companies, then you might want to factor this into your ratios by using a profit-based ratio.
Using POAS to Measure Profitability
POAS stands for profit on ad spend and is a slight modification of ROAS. Instead of comparing revenue to the cost of your ads, first subtract the cost of materials from your revenue to determine your gross profit Then divide this profit by the cost of the ads.
If $2,000 in sales costs you $500, leaving you with a gross profit of $1,500, then the $500 you spent on ads means your POAS ratio is 3:1. If those goods cost you $1,500, then your ratio is only 1:1, which essentially means the ads are costing you more than they’re worth — unless you’re banking on subsequent sales from your new loyal customers.