ROAS: What it is, How to Calculate it + Tips to Improve it

You already know what ROI means, but do you know what ROAS is? This metric is also super important for the health of your business. Check out more here.

Salesforce

November 4, 2024 8 min read

You already know what ROI means, but do you know what ROAS is? This metric is also super important for the health of your business. Check out more here.

Return on investment (ROI) is a familiar concept for marketing and sales managers. However, ROAS (return on advertising investment) is still rarely discussed in teams’ strategic planning. If you want to measure the effectiveness of your paid media actions, ROAS is the metric you should focus on.

What is ROAS?

ROAS (return on advertising spend) measures the profit generated from advertising campaigns. The indicator provides guidance on the cost-benefit you are getting from your paid media advertising campaigns. In other words, it clarifies whether you are losing money or whether it is worth investing more.

So, a low ROAS requires you to analyse the effectiveness of your ads, while a high ROAS shows good opportunities to invest and generate more business. Oh! Remember that ROAS and ROI are not the same thing, okay? Both signal a return on investment, but ROAS has a very specific focus on marketing actions, while ROI is more comprehensive.

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What is the difference between ROAS and ROI?

As mentioned above, ROI is more comprehensive and presents the return on both specific campaigns and the entire marketing strategy, as well as other expenses, such as the value of the product or service. ROAS, on the other hand, focuses specifically on advertising campaigns and doesn’t consider organic campaigns or other investments.

When analysed together, these metrics provide solid support, increasing the chances of optimising resources and achieving more satisfactory returns. Therefore, paid campaigns deserve more attention in terms of their financial return. This is because in organic work, such as Content Marketing, producing evergreen content is more common, bringing more lasting returns.

As long as your website or blog is online, the content you publish there can generate returns. A paid advertising campaign is something that usually has a one-time effect, so it should show solid results in the short term.

Organic content, on the other hand, tends to yield greater long-term returns, such as relationships, credibility, and brand trust.

READ MORE: What is a Sales Funnel? Stages and How to Build an Effective Sales Funnel

How important is ROAS for a business?

ROAS can prevent your business from losing money on campaigns. Therefore, it should not be ignored and is practically mandatory for companies that invest in paid advertising. However, it’s important to remember that ROAS should not be the only indicator analysed to create a comprehensive strategy. Taking a holistic view of all the reports is essential.

In other words, we can say that ROAS matters because it indicates where your company may be losing money, which ads are not bringing in returns, or causing losses. However, if a campaign or action brings satisfactory results, the company has an indication that it may be worth investing more in it.

Some benefits of calculating ROAS include:

Evaluation of average performance and financial return of your advertising campaigns;
Getting accurate data to support ad spend increases, campaign budget changes, and more;
Definition of advertising campaigns, most valuable and best-performing ads;
Obtaining a baseline average for your ads to compare with future calculations.

How to calculate and monitor ROAS?

To calculate ROAS, you must follow the formula below:

ROAS = (Ad Attributable Revenue/Ad Cost) x 100

Translating the formula into practical examples, imagine that your company invested $1,000 in an advertising campaign and obtained a revenue of $3,000 from these ads. In the end, dividing the revenue value ($3,000) by the cost of the ads ($1,000), we realise that your company obtained a return of $3.00 for every $1.00 invested, representing a ROAS of 3.

To obtain the return percentage, the value must be multiplied by 100. In our hypothetical example, this results in a 300% return, which is considered an excellent result. Later in this text, we will discuss what is regarded as a healthy ROAS and what is not.

In the meantime, it’s worth thinking about the formula. First of all, you need to think about the costs that will be included in the calculation. In addition to the specific platform used for the campaign, will you include expenses with partners, collaborators, and suppliers in the calculation? If you choose not to include all of these costs generated by the ads, this will generate an artificially high ROAS, which can provide false insights and hinder your strategy.

What is a good ROAS?

Contrary to what many people may think, a simple number cannot translate into a good ROAS. In fact, countless other factors can interfere with this interpretation. Campaign objectives and paid media strategies are some elements that can make ROAS vary. However, one thing is certain: the higher your ROAS, the better for you—and for your business.

In general terms, what we can say is that companies usually aim for a ROAS of 4, which means that for every $1,000 invested, there is a return of $4,000. However, as in most cases, practice is different from theory. Therefore, the general average achieved is a ROAS of 2. Therefore, a ROAS of 2 or more is considered good, and if it reaches 1, you need to be careful.

What elements should you analyse to decide whether your ROAS is competitive?

Some factors are essential, such as:

Your sector
Your profit margins
Your average cost per click (CPC)
Campaign objectives

The campaign objectives must be well-defined. If your company is new to the market and is looking for brand recognition, branding and awareness strategies, you should not expect a high ROAS since, at this point, brand recognition does not tend to generate immediate conversions.

In addition to having an ideal number for each company, there is also a distinction between the expected score by industry. Some industries require a higher ROAS to make advertising spending worthwhile. For example, a company with a low Customer Lifetime Value (CLV) needs to have a higher ROAS to compensate for the low revenue generated over the lifetime of its customers.

Finally, it is worth reinforcing that ROAS is a complementary metric and that, regardless of whether it is high or low, it needs to be analysed in conjunction with other important marketing indicators.

READ MORE: 3 Keys to a Winning Social Commerce Strategy

My ROAS is low. What now?

What constitutes a good ROAS can be a flexible answer. This means that a ROAS of 1 – which would be considered low – doesn’t always have to be a cause for despair. First, there are a few things you need to consider.

Your first step should always be to review your costs and ensure you capture them accurately. Once you’ve done this, if you’ve made any changes to your costs, recalculate your ROAS before making any decisions about the next steps.

In certain circumstances, a ROAS lower than 2 may be acceptable. For example:

When you are promoting a new brand

If you’re working on launching a new brand, a low ROAS isn’t necessarily a cause for concern. After all, it will take time for your brand to gain traction. The goal here is to see continued improvements over time.

When you are launching into a new market

Similarly, when launching a new brand, if you’re targeting a new market, you may end up with a low number. Again, monitor this over time to see improvements as you gain traction.

Above all, a ROAS depends on your campaign goals

When evaluating your ROAS, keep your campaign goals in mind. For example, if your campaign’s primary KPI is brand awareness, a lower return on ad spend should be expected and is not fully indicative of performance.

READ MORE: 5 Small Business Marketing Tools To Generate More Leads

How to improve ROAS: 5 essential tips

Improve customer experience in the digital world

Factors such as copywriting and the images you use in your ads can influence the user experience. To improve these issues, it is best to conduct user experience studies to get to know your buyer persona and target audience to learn about their preferences and how your potential customer behaves. Based on this information, you can create attractive ads that convert.

Direct users to attractive landing pages

After a user clicks on your ad, where do they go? If you want to focus on conversions, the ideal is for them to be sent to a page that encourages this behaviour and decision-making. A landing page, for example, is great for this situation.

Additionally, review your landing page to make sure it offers a user-friendly experience and is easy to navigate. This is also a good time to test your landing page’s compatibility with the mobile devices most used by your target audience (do they use desktop or mobile more?) through A/B testing.

Reduce your paid media costs

Considering that advertising costs contribute a lot to your ROAS, this is a great place to look for ways to reduce them. There are a few ways to do this.

For starters, you can reduce the time you spend on ad management. Another potential cost-saving feature involves reviewing your targeting to ensure you’re not wasting money on the wrong audience.

Review your attribution model

Advertising has many attribution models: first-click, last-click, and multi-touch. The default model is usually “last-click” attribution, but this may not necessarily be right for your campaign.

First-click or last-click models can impact ROAS and even make successful campaigns appear to be underperforming.

Did you enjoy learning more about ROAS?

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