What Does ‘ROAS’ Mean In Digital Marketing?

Photo from Pixabay - article on ROAS term.
Courtesy of pixabay.com

 

Overview

Return On Ad Spend, (ROAS) is a marketing metric, commonly used by e-commerce businesses, that evaluates the performance and effectiveness of a digital advertising campaign. Essentially, ROAS measures how much a business earns in revenue for every dollar spent on ads. 

ROAS provides a deeper insight into what is working for ads, ad groups, or ad campaigns so that e-commerce businesses can make informed decisions on where to invest their ad dollars, determine which marketing channels are working best and therefore do more of the same while changing what doesn’t work. 

Here is a video explaining what ROAS is with concrete examples and how it works by the pay-per-click advertising and digital marketing company, Surfside PPC:

 

How To Calculate ROAS (Return On Ad Spend)?

The equation below yields the ratio that can help you determine whether your ad campaign is working. To determine the ROAS of an ad campaign, one simply has to divide the amount of revenue generated by ads by the cost of the ads.

Below is an example from bigcommerce.com

For example, a company spends $2,000 on an online advertising campaign in a single month. In this month, the campaign results in revenue of $10,000. Therefore, the ROAS is a ratio of 5 to 1 (or 500 percent) as $10,000 divided by $2,000 = $5.

Revenue: $10,000

_________________ ROAS = $5 OR 5:1

Cost: $2000

For every dollar that the company spends on its advertising campaign, it generates $5 worth of revenue.

 

Here is why ROAS is superior to CPA as per wordstream.com,

“Not all conversions are created equal. It’s up to us as marketers to create appropriate conversion actions that show accurate successes in our advertising efforts. A common metric used to determine the success of a paid search campaign is CPA, or cost per conversion. While very useful for measuring volume of conversions, it only measures the average cost associated with any one, single action.”

 

How To Optimize Return On Ad Spend (ROAS)

Although increased traffic and a high CTR are upsides, the action that the customer takes is what matters more since at the end of the day revenue is what really matters.

Thus, it is important to know whether ads are generating more revenue than the money they cost in the first place and how to optimize for better ROAS.

Here are a few tips that can help optimize ROAS according to adespresso.com:

#1 – Review Its Accuracy 

If your ROAS isn’t accurate, you could end up cancelling a highly competitive campaign for no reason.

The first step when you face a low ROAS is to review your metrics. Are you considering all the costs of your advertising? What Google Ads attribution model are you using?

#2 – Lower the Cost of Your Ads 

ROAS includes two metrics – the cost of ads and your revenue. If you can lower your ad cost, you can drastically improve your ROAS.

What this looks like will vary based on your business, who manages your ads, and what types of ads you are running. 

#3 – Improve the Revenue Generated by Ads 

The second metric in ROAS is revenue. If you’ve done everything you can to reduce the cost of your ads, it’s time to look for ways to improve the revenue generated from your ads. Make sure to consider ROAS alongside other metrics like CTR and CPC to see where your ads are going wrong.

 

Conclusion

That is the run-down on what the advertising metric ‘ROAS’ or “Return On Ad Spend  Rate” stands for in online advertising and how it works. 

 

 

 

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