Unlocking the power of ROAS: How to calculate and boost your return on ad spend

ROAS (or return on ad spend) is a simple measuring tool for determining the revenue earned for each dollar spent on advertising. This is one of the most important advertising metrics because it answers a lot of questions.

• Am I earning more than what I’m spending?
• Am I just breaking even?
• Is the campaign incurring a net loss?

Learn how to calculate ROAS and the best tricks used by marketers for maximizing the effectiveness of their digital advertising dollars.

How to calculate ROAS

ROI calculation is simple: divide the revenue by the ad spend of your campaign. Here’s a small-scale example. Let’s say a particular campaign netted $500 in profit. The same campaign cost $100 to run in ads. Divide 500 by 100 for a profit ratio of 5:1. The higher the ratio, the more effective your ROAS. In other words, a ROAS ratio of 4:1 is more effective than, say, 2:1. It’s also possible to incur a negative ratio, such as 1:2, meaning you’re spending more than what you’re earning back.

It’s important to establish benchmarks when calculating ROAS. Determine the ROAS average for a business of your industry and size. You can also set benchmarks by comparing internal campaigns. For example, let’s say a keyword bidding stint yielded a ROAS ratio of 3:1 for a cost-per-click (CPC) campaign, and 2:1 for a cost-per-impression (CPM) campaign of a similar keyword. The CPC campaign performed better. Consequently, you can make adjustments, perhaps by allocating a greater advertising budget toward CPC campaigns.

Best practices for improving ROAS

Consider these ad spend optimization tricks of the trade utilized by marketers across B2C and B2B industries.

1. Define clear advertising objectives

Set clear goals with numerics and deadlines. For example, achieving a 3:1 ROAS by next quarter, and a 4:1 for at least half of your campaigns by the end of the calendar year.

2. Target the right audience

Segment your audience and optimize your ads for each segment. Employ a multichannel marketing approach to determine effective ad targeting solutions. For example, one demographic may respond more favorably to YouTube videos, while another more actively engages with written blog content. Likewise, click-through rate (CTR) for ad retargeting may be higher in one segment than another.

3. Optimize ad copy and creative

Diversify your ad mediums and prioritize ads that elicit the best response and engagement. Types of ad creatives include but are not limited to:

• DIY tutorials
• Product demonstrations
• Unboxing videos
• Influencer video stories

The above may apply more or less depending on your industry. Methods available may also vary depending on the platform. On Facebook, for instance, you may have access to special ad types like canvas, carousel, and collection ads.

4. Utilize advanced ad placement strategies

A/B test different ad placements over your website. Common placement areas include:

• Above the fold (the part of the website that can be seen without scrolling)
• Below the fold (requires scrolling to see)
• Sidebar panel

5. Frequently analyze performance

Use a marketing analytics tool to track progress and attribution modeling in real-time. This will help you determine day-by-day or even hour-by-hour whether you’re on track to hitting ROAS benchmarks. 

ROAS vs. ROI: Understanding the key differences

Though the two are similar, ROAS shouldn’t be confused with return on investment (ROI).

The latter measures the success of a marketing campaign or product profitability over a span of time. The ROI formula is as follows:

((Total profit – total marketing spend)➗total marketing spend) x 100

Whereas ROAS focuses more on net profit in relation to advertising/marketing spend, ROI operates on a broader scale. It takes into account other factors, such as the cost of product development, supply chain, outsourcing, etc.

Maximize ROAS with Lytics as your partner

With the complexity of the modern marketing landscape, a marketing automation tool can be your greatest partner in crime. From sales funnel management to landing page optimization, Lytics help you kickstart your performance marketing campaign and achieve your benchmark ROAS.