What Is Return on Ad Spend (ROAS) & How to Calculate It

What Is Return on Ad Spend (ROAS) & How to Calculate It

4 Min Read

As marketers evolve their strategies to effectively advertise a brand or product, there are plenty of digital marketing metrics used to evaluate the success of ad campaigns. These include customer lifetime value, conversion rate, and more.

Today we are doing a deep dive into the data that every marketer should be looking at, starting with one of the most useful industry standards – ROAS (Return on Ad Spend). In this article, we’ll discuss what ROAS is, a good target ROAS to aim for, and how to calculate it.

What Is Return on Ad Spend?

Return on Ad Spend (ROAS) is a performance marketing metric that evaluates the efficiency and profitability of an advertising campaign. Specifically, it calculates the amount of revenue generated for each dollar spent on advertising, offering a clear insight into the effectiveness of a business’s marketing efforts.

Why Is ROAS Important?

Here are five reasons why ROAS is important for businesses to understand:

  • Efficiency Measurement: ROAS helps determine the efficiency of an advertising campaign, showing how much revenue each advertising dollar brings in.
  • Budget Allocation: By identifying high-performing campaigns, ROAS assists businesses in optimizing their budget allocation to maximize profits.
  • Performance Evaluation: It enables marketers to assess and compare the performance of various marketing channels and campaigns, aiding strategic decision-making.
  • Profitability Analysis: ROAS helps ascertain whether the profit generated from advertising spend exceeds the cost, providing a clear view of profitability.
  • Informed Strategic Planning: With insights from ROAS, businesses can develop effective marketing strategies, make informed adjustments, and set realistic objectives for future campaigns.

The world of digital marketing is all about data, and the metrics you choose to track are defined by what is important to your business. Your company likely will want to know exactly how well your campaigns are performing, and calculating ROAS is essential for effectively evaluating the success of those ad campaigns.

How to Calculate Return on Ad Spend

There are a couple of ways to calculate ROAS in marketing, but here is the most commonly used ROAS formula:

Return on Ad Spend = Gross Revenue / Ad Spend

While ROAS is essential to evaluating the success of your campaign, make sure you are using the right input data to get an accurate performance metric. There is usually more than one factor involved in both your total revenue and ad spend, so be careful not to miss any line items while adding up each variable.

This could include anything from management costs (like partner fees or sales commissions) to impression metrics (such as cost-per-click or conversions). Keeping track of everything that goes into your gross revenue will provide a more accurate ROAS calculation, allowing you to better evaluate the success of your campaigns.

An Example of How It’s Used

As an example of using this ROAS formula, let’s say your advertising campaign generated $100,000 in revenue, and you spent $10,000 on your campaign. To calculate ROAS, divide 100,000 / 10,000 to get the return on ad spend of 10:1.

What Is a Good ROAS?

There is an easy way to know whether your ROAS indicates a successful ad campaign or an unsuccessful one. If your return on ad spend calculation is under 1, that means your advertising costs are larger than your revenue, and your ad campaigns are not positively impacting your business. However, if your ROAS calculation is greater than 1, then your ad campaigns are driving enough revenue to make a profit. 

The higher your target ROAS, the bigger your return — so be sure you’re getting it as high as you can. If you are interested in growing your ROAS, find out how we can help boost your ROAS performance.

Return on Advertising Spend (ROAS): Final Thoughts

At MNTN, we know that understanding ROAS and how to calculate it is crucial for any business looking to maximize the effectiveness of its advertising campaigns. A strong grasp of return on ad spend allows for data-driven decision-making, helping to drive more successful marketing strategies and ultimately leading to better profitability and growth.