Return on ad spend calculator
This simple calculator will help you determine the efficiency of your paid ad campaigns.
- Check your marketing reports to see how much you’re spending on advertising and how much revenue your ads are generating
- Fill in the fields with this data and hit ‘Calculate’ to see how well your ads are performing
Calculate your ROAS.
ROAS 101: Your ultimate guide to data-driven marketing
Digital marketers will tell you that investing resources into paid acquisition campaigns is easy. However, determining the efficacy and effectiveness of these advertising efforts is a different story altogether.
This is where marketing metrics come in, and whenever marketing metrics are on the table, return on ad spend is never far from the discussion.
Return on ad spend, which going forward, we shall abbreviate as ROAS, is one of the most powerful tools in any digital marketer's arsenal.
That said, it's essential that both you and your teams understand its intricacies and how you can leverage it to better your digital advertising.
Table of contents
- ROAS 101: Your ultimate guide to data-driven marketing
- What is ROAS?
- How to calculate return on ad spend (ROAS)
- Examples of return on ad spend in action
- What return on ad spend isn't
- Actionable tips for improving your PPC return on ad spend
- Why bother to calculate ROAS? The benefits of ROAS finance
- Limitations of ROAS in a digital marketing campaign
- Where we come in
What is ROAS?
The digital marketing metric ROAS measures how much revenue you make for each euro you spend on your marketing ad campaign.
ROAS is expressed as a ratio. For example, a ROAS of 5: 1 represents a £5 increase in revenue for each £1 you spent on your digital advertising campaign.
There are only three possibilities in marketing. You are either losing money, stagnating (sometimes worse than losing money), or gaining money; calculating ROAS tells your department where you are on this scale.
How to calculate return on ad spend (ROAS)
Once you get past the technical jargon, you'll realise that ROAS is one of the easiest formulas on this side of essential marketing metrics. You calculate ROAS by taking the total amount of money you spend on a marketing initiative and dividing it by the revenue generated from that initiative.
Fortunately, you can use either of these formulas depending on how you run your marketing campaigns:
Total revenue generated from ad source/cost of ad source
Revenue made from ads/advertising spend*100
Total ad-attributed sales/ad spend
Conversion value refers to the amount of money your business earns from a given conversion. The cost refers to the total amount spent in creating a conversion.
A few components of marketing spend that marketers often forget include:
This refers to the cost of the equipment (both hardware and software) that you used in your digital marketing campaign.
This includes the remuneration of all third party sources that you outsourced parts of your campaign to, such as graphic designers and freelance writers.
Labour costs refer to the remuneration of all your in-house employees and teams that came together to bring your marketing campaign to life.
This includes your network transaction fees and commissions that were part of your marketing campaign.
Examples of return on ad spend in action
Now that you have both the formula and the definition, a practical example is the missing piece of this puzzle.
After going through these examples and getting a deeper look into ROAS, you'll have a better understanding of how to measure ROAS and how easy it actually is.
Pay-per-click (PPC) example
After reading that conversions brought by PPC are 50% higher than organic advertising, your teams decided to invest £10,000 in pay-per-click advertising.
Your other marketing metrics show that this results in a £30,000 revenue increase. From the ROAS formula above, your ratio is 3:1 or 300%.
This means that for every dollar spent on pay-per-click advertising, you were able to get three dollars back. Though it varies from one business to another, a ratio of 3:1 is considered average. It's far from exceptional but at the same time nothing to worry about.
Facebook and Instagram ad example
Wanting to be part of 70% of other marketers, you and your team decide to invest in Facebook and Instagram marketing.
You and your teams spend £2,000 on Facebook and Instagram ads aimed at your target audience. That month, you are able to sell 50 products worth £100 as a direct result of your Facebook advertising.
From this example, your team generated £10,000 in sales revenue from a £2,000 investment. This is a ratio of 5:1 or a 500% return on ad investment, which is great campaign success.
What return on ad spend isn't
Now that you know what ROAS is, it's equally essential to learn what it isn't. Marketing has many key metrics, and it's not unusual to find yourself mixing them up every once in a while.
1. ROAS is not ROI
Given the many similarities between Return On Investment (ROI) and Return On Ad Spend (ROAS), it's no surprise people draw parallels and confuse them often.
The formula for Return On Investment is:
Net profit/Net spend
It's crucial to note that other expenses such as the cost of software, design, and human resource are included when calculating the ROI and left out in ROAS calculations.
Example showcasing the difference between ROI and ROAS:
Let's assume your marketing team spent £10,000 on Facebook ads and made £20,000 in revenue. Above that, other expenses such as human resources and marketing tools totalled £14,000.
Your ROAS will be £20,000/£10,000, which is 200%. On the other hand, your ROI will be £20,000/£24,000, which is -16.3%.
2. ROAS is not CPA
Another popular metric that marketers usually jumble with ROAS is the cost per conversion rate (CPA).
An essential metric itself, CPA takes the cost of conversion divided by the total number of conversions.
The formula for Cost Per Conversion is:
Cost of conversion/ number of conversions.
Example showing the difference between CPA and ROA:
Take two PPC campaigns. The first one cost £200, generated £400, and two conversions. The second one cost £200, generated £800, and made two conversions.
Using CPA, the two campaigns are equally successful. However, using ROAS, the second campaign has a high ROAS of 400%, whereas the first one has a ROAS of 200%.
3. ROAS is not CTR
The click-through rate (CTR) is another crucial metric that marketers use to measure campaign performance.
The CTR refers to the number of clicks advertisers receive on their ads per the number of impressions.
The formula for CTR is:
Total Clicks On Ad/Total Impressions
Example showing the difference between CTR and ROAS:
Let's say your team spent £1,000 on an advertising campaign, generating £1,500 in revenue. Your advert ran 100 times (total impressions) and generated 60 clicks.
Notice here that your ROAS is £1500/£1000 that is 150% which is pretty low. However, your CTR is 100/40 which is 250% (pretty high).
These actionable insights show that your ad is effective; customers click on it, but they don't convert into buyers.
This may be a sign of issues with your landing page (or lack of), call to action, or website design issues such as clutter.
Actionable tips for improving your PPC return on ad spend
Many guides revolve around the issue of ROAS, touching on everything but what you can do to make it better. These brief, actionable, no B.S steps will be your first steps in improving ROAS on PPC. They are:
Using negative keywords
Negative keywords prevent your ads being shown whenever a prospect uses specific keywords. Why? Well, it cuts down on your costs.
For example, if you sell men's shoes, putting "women" as a negative keyword eliminates your ad from all searches with the term women.
Use branded campaigns
Ad marketers that leverage their brand names have more conversions than those that leverage keywords alone.
A/B test your landing pages
Using a single landing page for your conversion will cost your business. Come up with different landing pages and A/B test them to determine which one has the highest ROAS data.
Optimise your bids by time and location
Reducing your impressions in locations that don't convert and off-peak times and days goes a long way in reducing the amount you spend on ads.
Why bother to calculate ROAS? The benefits of ROAS finance
ROAS comes in handy at various stages of an advertising campaign. However, you'd be surprised at the number of advertising campaigns running without leveraging ROAS.
Primarily, ROAS will help you answer the question, "Did the recent changes we made generate revenue?"
Some of the uses of ROAS include:
1. Measuring the effectiveness of your marketing campaign
ROAS helps you measure the efficacy of your ad campaigns. A ROAS of 2:1 is unhealthy and prompts a careful reassessment of your advertising campaign.
Further upwards is a ROAS of 3:1, which may signify problems elsewhere in your marketing campaign. From there, a ROAS of 4:1 and upwards is considered healthy and a sign of an effective marketing strategy.
2. Gives insight into your campaign
Assuming that you run different advertising initiatives, looking at each campaign individually can become an issue.
With ROAS on your side, you can segment these campaigns into those that are effective or ineffective. Moreover, you can use this data for informed decision-making and choosing whether to invest or cancel ineffective campaigns altogether.
3. Complement other metrics
Measuring an ad campaign using a single marketing metric is the equivalent of drawing a line graph using a single coordinate.
That said, ROAS helps put other metrics into perspective, which comes in handy in informed decision-making.
For instance, take an ad campaign with a negative ROI but a positive ROAS. With the understanding of key metrics, you'll be able to discover that there is nothing wrong with the ad campaign itself. The problem, however, is from the external costs that are involved in calculating the ROI.
4. ROAS is flexible and specific
Unlike ROI, which marketers mostly apply to entire ad campaigns, ROAS gives the marketers the chance to narrow down on an ad campaign and be more specific.
In a digital marketing campaign, you can use ROAS to calculate ad spend on Facebook, Instagram and PPC marketing individually.
And it doesn't stop there. You can also calculate ROAS for your entire ad spend initiative or even segment them into related groups.
5. Used to request funding from executives
In any digital marketing campaign, only the successful ad spend campaign gets increased or prolonged funding.
Executives and other higher-ups in the marketing departments quickly pull the plug on any digital campaign that isn't showing or promising returns.
By calculating the ROAS, a marketing team has proof of the effectiveness of its effort. A strong ROAS comes in handy even more when other marketing metrics like ROI don't favour the campaign.
Limitations of ROAS in a digital marketing campaign
Like every other metric, ROAS comes with its fair share of shortcomings. That said, a positive ROAS doesn't always guarantee profitability, efficiency, or growth.
Some of these limitations include:
1. It leaves out other costs
This problem results from the ROAS formula leaving out other marketing campaign costs, which means you could still be losing money on a positive ROAS campaign.
Costs like human resources, tools, and technologies can quickly add up to the point of offsetting the revenue from the sales. Sadly, ROAS doesn't take this into account.
To reduce the effect of this limitation, it is advisable to use other metrics such as ROI to put your ROAS into perspective.
2. Not all campaigns are revenue-focused
An efficient campaign may not necessarily bring indirect revenue. However, some campaigns may excel at other positive outcomes such as brand awareness and consumer education.
Unfortunately, gains in brand awareness slip through the ROAS formula, and such campaigns, despite their effectiveness, may be deemed null and void.
That said, it's crucial to always have the goal of your PPC campaign at the back of your mind. If you're launching a new product and focused on brand awareness, the initial revenue generation shouldn't be a cause for worry.
Where we come in
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