What is return on ad spend (ROAS)?
Return on advertising spend (ROAS) is the total amount of revenue a business receives for every dollar spent on an advertising channel or program. It is used to measure the effectiveness of advertising. The higher the return, the more effective the advertising.
How to calculate ROAS
ROAS is deceptively simple to calculate. All you have to do is take the total amount of revenue generated by the advertising and divide it by the amount spent on the ad. The challenge for many businesses is understanding how much revenue is attributable to their advertising.
The formula looks like this: revenue ÷ spend = ROAS
For example, if a business spends $1,000 on Facebook ads in a month and earns $4,000 in revenue during that period, the ROAS for the ads is $4:1. ($4,000/$1,000= $4).
What your ROAS goal should be
ROAS provides insight into whether or not a marketing channel is performing at a level that will lead to profitability. For every dollar spent, you would need to make at least a dollar back to break even. There are some situations where negative ROAS might make sense (e.g., pure brand awareness initiatives, etc.).
Your goal for ROAS will depend on the kind of business you have. A $4:1 ROAS is great for some businesses. Others will need to see a much higher return, like $10:1. Your margins will be one of the biggest factors in setting the number. Low-margin businesses will need to keep their ROAS as high as possible.
Why ROAS is useful
When you look at ROAS along with other metrics like customer lifetime value (CLV), cost per lead (CPL) and cost per acquisition (CPA), you get a more complete view of your marketing’s performance. This helps you identify the value of specific segments, and adjust your marketing spend to reach them.