In marketing, there are a bunch of indicators that allow you to calculate the return on investment in advertising. They are useful when compiling reports, as well as when calculating the advertising budget for the next period – with their help, you can find out which channels are effective and which ones should be abandoned. One such metric is ROAS.
I will tell you what this indicator is, how to calculate it and give some examples of its use.
What is ROAS?
… an indicator of the return on ad spend, and this is literally translated from English (Return On Ad Spend). It shows how profitable the investment in advertising is and allows you to measure the effectiveness of both the whole campaign and individual ads or their groups, as well as keywords. With it, you can determine the degree of payback according to the following principle:
- ROAS less than 100% – investments did not materialize, the campaign went at a loss;
- ROAS is 100% – advertising paid off, but did not bring profit (went to zero);
- ROAS more than 100% – the campaign was successful and made a profit.
Employees typically compare these metrics across multiple campaigns to determine the most profitable source. And moreover, all this is not considered for a specific period, but for the entire time that the advertisement was active.
What is it for
While other metrics measure performance by clicks, impressions, or traffic generated, ROAS focuses on calculating the cost-effectiveness of ads in general. With this indicator, you can determine the level of income, as well as the success or failure in the application of certain marketing techniques or techniques.
ROAS Calculation Formula
To calculate ROAS, you need to use the following formula:
Example 1 . We are launching contextual advertising in Yandex.Direct with a budget of 30,000 rubles. The income from it amounted to 45,000 rubles. To calculate ROAS in this case, do the following:
It turns out that the ROAS for this campaign was 150%, which means that it paid off and even made a profit.
Example 2 . We launch an ad group in Yandex.Direct with a total cost of 200,000 rubles. As a result, it brings a profit of 125,000 rubles. Now we calculate ROAS and see what happens:
As we remember, if the ROAS indicator was less than 100%, then the company turned out to be unprofitable.
Example 3 . Now we are launching advertising in Google Ads with a budget of $500. At the end of the month, ad revenue was $1,800. Next, we proceed to calculate ROAS:
The campaign paid off well, with $3.60 in revenue for every dollar invested in advertising.
Differences from ROI and ROMI
ROI demonstrates exactly the return on investment – it can be used to understand how profitable or unprofitable a business is, taking into account all investments. This indicator is calculated as follows:
Here, by the way, expenses mean all investments in business development, including the cost of goods, wages to employees, advertising costs, and other operating expenses. And income is all the money that was received as a result of a perfect investment.
ROMI is about the same, but in the field of marketing investments. And it is calculated using the following formula:
ROMI is suitable when you want to get a more objective assessment of your marketing investments. And ROAS is calculated when additional cost data like margins and other things are not available.
In general, the main difference is that ROAS only counts the costs incurred for the specific campaign being calculated. And for ROI and ROMI, other business costs are additionally taken into account, such as employee salaries, product margins, and much more.
Ways to increase ROAS
There are several ways to improve your return on investment (ROAS) for advertising, and they are as follows:
- Recheck data. It is possible that some information was not taken into account when compiling reports, so even for a completely successful campaign, a loss-making indicator may come out.
- Increase conversion. To do this, it is recommended to review the design or organization principle of the site to which traffic is attracted. It should be simple and understandable for the user, so that he immediately guessed how to place a purchase order or submit an application.
- Decreased cost per click. Refinement of advertising creatives, double-checking their relevance for the selected target audience can help here. If you correctly define the target audience and accurately assess the demand for the goods or services offered, then indicators such as CPC, CPM and CTR will decrease, as a result of which the payback will increase.
- Monitor conversion. You should turn off advertising on irrelevant channels in time and reallocate the remaining budget to more effective campaigns.
- Review company costs. Perhaps some fixed or variable costs are excessively high – they can often be reduced or eliminated altogether.
The payback of advertising depends on a huge number of factors. First of all, this is the demand for the promoted product among the representatives of the target audience. It is almost impossible to list all these parameters, however, ROAS will help determine whether you have chosen the right direction and promotion strategy.