What is Return on Ad Spend And How to Calculate ROAS
Return on Ad Spend (ROAS) is crucial for the success of your advertising campaigns. Here's how to calculate & monitor your ROAS.
What is Return on Ad Spend And How to Calculate ROAS
Don’t manage your advertising budget flying blind.
You need to learn how to calculate your Return on Ad Spend (ROAS) and consistently monitor it to ensure your advertising cost is bringing you meaningful results.
Without knowing your ROAS, you’ll struggle to scale, likely overspend on ineffective campaigns, and miss out on optimization opportunities.
TL;DR: Calculate and monitor your ROAS. It is crucial for the success of your advertising campaigns.
So, you might ask, how do you start calculating ROAS?
This guide is your friendly walkthrough on everything ROAS. We're diving into what it is, how to figure it out, and the essential metrics that show if your advertising is taking your business to the next level.
You can determine your ROAS (expressed as a ratio) by calculating how much revenue you earned compared to the budget you spent.
The higher the ROAS ratio, the better your campaigns and ads performance and, in turn, your company’s profitability.
ROAS can apply to your entire advertising or marketing budget, including specific campaigns.
For instance, if you run Pay-Per-Click (PPC) ads and direct marketing campaigns, you can determine your returns by calculating ROAS.
How to calculate the Return on Ad Spend?
Calculating ROAS is pretty straightforward.
Simply divide your ad campaign's revenue by the amount you spend on the campaign to get a percentage or ratio.
Suppose you spend $5,000 on your ad campaign for one month, and it generates $20,000 in revenue.
To calculate ROAS, follow this formula:
Each dollar you spent for ads for the one-month campaign generated $4 in revenue, giving you a 400% or 4:1 return.
You can also use ROAS calculator tools online or spreadsheet formulas to calculate your ad campaign returns.
Generally, if you get back more than you spent on advertising, you’re on the right track.
To determine your ad campaign’s profitability and profit margins, you must calculate break-even ROAS.
The break-even ROAS is the point wherein the revenue generated by your campaign equals the amount spent on advertising.
Break-even ROAS tells you how much your ad needs to make to cover the cost of the service or products your ads are promoting.
The break-even ROAS formula is:
If your average profit margin is 70%, your break-even ROAS would be:
If your ROAS is lower than this figure, your ad program or campaign is losing money.
Why does calculating ROAS matter?
Calculating ROAS helps you keep track of the money you spend on your online advertising campaigns.
Essentially, calculating ROAS eliminates guesswork, helping you make data-driven decisions to gain significant and sustainable returns.
Measuring your ROAS can also tell you which channels are best for your advertising and marketing initiatives.
For instance, tracking ROAS across multiple channels, such as Facebook and Google ads, can tell you where your ads reach customers and successfully convert them.
You’ll know which areas need improvement to optimize your advertising and marketing efforts and increase your returns.
ROAS vs. other metrics
Comparing ROAS with other crucial advertising, marketing, and ecommerce KPIs and metrics can give you a comprehensive understanding of your campaign’s effectiveness and performance.
Consider the following metrics to compare and analyze with ROAS.
ROAS vs. ROI
ROAS and Return on Investment (ROI) are similar metrics since both generally measure the revenue generated from a specific fund allocation.
However, ROI and ROAS are different.
ROI calculates the return on a specific investment relative to the investment’s cost.
Put simply, ROI is the ratio between your net profit and investment.
To calculate ROI, divide your net profit by your net spend and multiply by 100.
ROI measures the performance of your investment to determine the revenue it generates. It allows you to assess the overall profitability of your expenditure.
On the other hand, ROAS helps you determine the effectiveness of an advertising campaign.
ROAS looks at revenue and only considers direct spending instead of other costs associated with your ad campaign.
ROAS helps you determine whether your ads generate clicks, impressions, and revenue.
Calculating and comparing ROAS and ROI is crucial to get a more comprehensive and realistic view of the effectiveness of your advertising and marketing efforts and their impact on your business.
Let’s say your company spends $5,000 on a monthly ad campaign for your new product.
You earn $10,000 in sales from the ad but spend $20,000 on various monthly expenses to accommodate the new product.
Subtract ad spend + various expenses ($25,000) from the total sales ($10,000), and you lose $15,000 in revenue.
To calculate ROI, divide the loss by the total expenses using this formula:
To calculate ROAS, divide the $10,000 (sales from ads) by $5,000 (ad spend):
The ROI and ROAS show that releasing the new product resulted in a loss, but your advertising campaign still generated revenue.
ROAS vs. Lifetime Value (LTV)
Lifetime Value (LTV) represents the total revenue your business expects to earn from a customer throughout your relationship.
The LTV metric factors in loyalty, repeat purchases, and overall contribution to your company over time to determine a customer’s long-term value.
Calculate LTV with these formulas:
LTV = Average Value of Sale x Number of Transactions x Retention Period
Customer Lifetime Value = Lifetime Value x Profit Margin
Tracking LTV allows you to determine the profitability of acquiring and retaining customers. It helps guide your marketing, customer acquisition, and Customer Relationship Management (CRM) strategies and decisions.
Comparing ROAS with LTV helps balance short-term profitability and long-term sustainability.
ROAS gives you insights into the immediate impact of your advertising efforts, helping you allocate resources and optimize short-term campaigns effectively.
On the other hand, LTV offers a holistic view of your customers by measuring the total value a customer brings to your business over their lifetime.
The insights help you look beyond transactional gains and build lasting customer relationships to maximize customer value.
Let’s illustrate the comparison between ROAS and LTV with an example.
You get a ROAS of 5 after spending $10,000 in an ad campaign and generating $50,000 in immediate revenue.
If a customer contributes an average of $300 in profit per year over five years (projected lifetime) through the campaign, your LTV would be:
While the high ROAS indicates immediate success, the LTV shows a significantly higher true long-term value per customer.
Comparing the two metrics helps you go beyond short-term gains and focus on allocating resources toward higher-value customer segments or customer retention.
Doing so ensures a more profitable and sustainable long-term business strategy.
Crucial considerations when calculating Return on Ad Spend
Ensure an accurate and comprehensive ad hoc analysis by considering the following factors when calculating ROAS.
All costs. Consider all the costs associated with your advertising, including agency fees, creative production, and other related expenses, for a more accurate ROAS calculation and analysis.
Time frame. Set a specific time frame for your ROAS calculation since short-term ROAS can fluctuate, leading to varying results. Consider whether to calculate ROAS daily, weekly, monthly, or quarterly.
Attribution models. Select an appropriate attribution model reflecting how your credit for conversions is assigned to various touchpoints in the customer journey. For example, standard attribution models include last-click, first-click, or multi-touch. The top ten best ecommerce apps, such as Polymer, can help simplify tracking and analyzing attribution data.
Cross-channel efforts. Integrate all data from relevant ad platforms, especially if your advertising and marketing efforts involve multiple channels. The holistic approach gives you a more accurate representation of the performance of your advertising efforts.
External factors and seasonality. Include seasonality and external factors that can influence your ROAS calculation. For instance, some industries can experience demand fluctuations due to holidays, shifting market conditions, or holidays impacting ROAS results.
Use Polymer to unify your crucial business data
Manually calculating ROAS and other key business metrics is time-consuming. Not only that, manual calculations are prone to human errors, especially when dealing with massive data.
The software can do the heavy lifting for you when it comes to centralizing and analyzing your advertising and marketing data, measuring ROAS and other metrics automatically, and turning them into stunning visualizations in seconds.
Connect your data source to Polymer with a few clicks through built-in data connectors.
Once your dataset is in Polymer, you can sort and filter it to view the key data you want, such as your ad spend.