Advertising is much more than purchasing a few thousand dollars of online ads. A brand must consider how its ad on one channel can affect the bottom line in others.
Above all else, it is measuring how effective these ads are. Throughout this article, we will explain what ROAS is, examples of how to calculate it, how it differs from ROI and CPA, and the methods to improve it.
ROAS (Return on Advertising Spend) is a metric designed to measure how much sales have gone up with advertising costs. ROAS is calculated based on product/service sales — the bigger the ROAS value is, the larger the contribution ads made to sales.
At the same time, ROAS is influenced by traffic, conversion, time spent on site, ad formats, and ad placement. Often, one specific measure may not be appropriate, so ROAS should be evaluated from multiple perspectives. In practical use, one can improve media plans by calculating the ROAS for each media being published and concentrating their budget on those that proved the most cost-effective.
The formula for ROAS (measured in %):
ROAS = (Total Sales Via Advertising ÷ Total Advertising Spend) * 100
Two major metrics makeup ROAS:
ROAS measures the effectiveness of advertisements, and sales are the simplest to measure. The key to effectively using ROAS is to calculate it based on sales via advertising and excluding all organic channels.
We also recommend calculating the results of each media over a specified period, rather than all of them at once. This will provide an insight into which ads are producing the needed results and expose those that are not.
Ad Spend is the amount one spent on ad campaigns during a particular period. As with sales via advertising, one is better off calculating results based on the individual ads of each media.
$500 = Ad Spend (Banner Ads)
$2,000 = Total Sales Via Advertising
ROAS = [Total Sales Via Advertising ($2,000) ÷ Ad Spend ($500)] * 100 = 400%
On a $500 ad spend, we can see that sales went up 400%.
$3,000 = Ad Spend (Banner Ads) $6,000 = Total Sales Via Advertising (Banner Ads)
$2,000 = SEO Cost $10,000 = Total Sales Via SEO
Banner Ads ROAS:
[Total Sales Via Advertising ($6,000) ÷ Ad Spend ($3,000)] * 100 = 200％
[Total Sales Via SEO ($10,000) ÷ SEO Cost ($2,000)] * 100 = 500％
[Combined Advertising and SEO Sales ($16,000) ÷ Combined Advertising and SEO Cost ($5,000)] * 100 ＝ 320％
According to the calculations, the total return equaled 320%. By comparing the individual returns for banner ads (200%) and SEO (500%), however, we can see that SEO was more effective than banner ads. It would be wise to increase the SEO budget at the expense of banner ads. Another way is to re-evaluate the banner ads campaign and optimize them to improve the total ROAS.
Return on ad spend can not only help calculate cost-effectiveness but can also reveal how much sales you need to achieve a target ROAS. For example, if you spend 4 million yen on a magazine ad, the formula for achieving a 500% ROAS is as follows:
$40,000 = Ad Spend (Magazines)
500% = Target ROAS
Ad Spend ($40,000) × ROAS (500％) = $200,000 (Expected Sales Via Advertising)
The ROAS formula is useful in planning marketing campaigns of all kinds. It is always possible to refer to a running campaign and use the formula to calculate the expected sales required to achieve a certain ROAS. In this case, to achieve a 500% ROAS on a $40,000 advertising budget, it would require $200,000 worth of magazine sales.
In addition to ROAS, other metrics can analyze ad effectiveness. In this section, we will review some common misconceptions about ROI and CPA as compared to ROAS.
ROI is a measure of return on investment. Unlike ROAS, ROI accounts for investments such as management fees, the cost of outsourcing talents, and, in some cases, overhead costs — ad cost/sales are not the sole determinant of ROI. Its major difference to ROAS is that ROAS uses sales as a base, while ROI uses profits.
ROI = Profit ÷ Cost of Investment
Though ROAS calculates how much ads contribute to sales, one's profit may still be in the negative regardless of sales. However, since ROI uses profits as its base, the metric can only show how much profit one is making.
CPA (Cost Per Acquisition) measures the percentage of conversions. This cost fluctuates depending on the ad channel, keyword, and other factors. In CPA campaigns, advertisers only pay when their ad leads to a conversion.
CPA = Ad Spend ÷ Number of Conversions
If an advertiser spent $1,000 on banner ads and ended up with 10 inquiries, for example, their CPA would be $100. For inquiry conversions, it is best to aim for lower CPA as it may diverge from actual sales. But even if the CPA is decent, the number of conversions may be low, making CPA a weak measure of ad efficacy. Instead, ROAS measures the cost associated with an ad's impact on conversion.
There are many ways to improve ROAS but it all boils down to:
But let us go through some examples of how to improve ROAS:
Online advertising is highly personalized these days, but it doesn't mean ads always reach the right audience. For some advertisers, social media does not generate enough leads to justify its costs. Luckily, we can use high converting ads to speed up the conversion process without having to wait around for our prospects to sign on the dotted line.
One reason a brand’s ROAS may be ineffective, however, is targeting the wrong prospects. If a cram school wanted to attract more students to their school, their ad’s target audience should be parents and not students.
Coupled with targeting the right audience, advertisers should tailor their ad's content to serve the intended audience. When a business is sure of its targeting but still records low ROAS, it would be best to re-examine the content of the ad.
Advertisers can improve the content of their ads by thinking about the above questions from the customer’s perspective, therefore helping improve conversions, and eventually their ROAS.
Google, Facebook, and Twitter are only three of the numerous advertising platforms. Ads may receive a lot of coverage from social media, but product purchases may end up taking place through a separate search engine. Solely relying on a platform/channel may be a mistake as some channels deliver higher ROAS than others.
Google Ads, Facebook, and Pinterest are powerful advertising channels, but each are suited to the advertiser’s needs and the nature of a brand’s campaign. Thus, it is crucial to settle on platforms only after thoroughly understanding the behavior patterns of one’s audience.
Once an advertiser has a clear idea of their marketing strategies and budget, it is time to revisit the campaign objectives. Are the existing customer base still within the target demographic? Is the conversion rate good, or are you chasing low-hanging fruit? The answers to these questions are likely to keep changing with the market and global trends.
The purchasing process for a consumer can also differ depending on whether an ad is selling a product or service. In selling luxury goods, for instance, it makes less sense to create ads that urge users to buy the item directly as it may take more time to decide whether to purchase or not. Thus, revisiting campaign goals and re-evaluating ad delivery can aid in optimizing ROAS.
Almost every brand has a budget for advertising, but that doesn't guarantee it is money well spent. Logos and fancy words may appear cool in ads, but businesses still need to get returns for what they spent. There is no better way to measure the efficacy of ad operations than ROAS. ROI and CPA are also often misunderstood indicators, but by using them together with ROAS, you can improve your advertising from a variety of perspectives.
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