What is Return on Ad Spend? (ROAS) Formula & Definition

Are you ready to learn more about marketing? In this article, we are going to cover the key aspects of Return on ad spend (ROAS).

If you’re a business owner or someone who works in marketing, you’ll want to see how the information in this article can help you optimize the ad revenue at your company. 

ROAS can appear a bit tricky on the surface, but we’ll break down all of the relevant details so that you can walk away with confidence on this subject.

Let’s get started!

Key Takeaways

• ROAS is a metric that’s used to gather how well an advertising campaign is performing.
• ROAS is easy to figure out, but there are many moving parts that should be considered prior to calculating.
• ROAS and ROI are different, and this can be important depending on your goals.
• A good ROAS depends on your location and desired demographic reach, but it is typically a number that exceeds the amount you’ve spent on ads. Increasing ROAS might involve a little creativity.

What is Return on Ad Spend (ROAS)?

ROAS is the calculable value that compares what you’ve spent on an ad and how many sales that ad has actually generated. 

ROAS can be used to determine the effectiveness of an advertising campaign. Previously named Return on Marketing Investment (ROMI), ROAS gained popularity in the early 90s after the release of many successful advertising books. 

In the present day, it is a very valuable tool for determining the performance of an advertising campaign.

Advertising is more present than ever before – especially on social media with brand deals and affiliate marketing.

How to Calculate ROAS (the formula)

The formula for calculating ROAS is simple: divide the revenue from ads by the cost of the ads themselves. Here’s the formula written out: 

That’s it! However, it’s important to consider several factors when calculating the cost of ads portion of the ROAS formula:

Partner/vendor costs

Sum the money required for partner and vendor costs to run the ads. This will give you a better idea of profitability based on your advertising. 

Also, this number may inspire you to rework your budget, which can make or break your advertising outcome.

Affiliate commissions

If you’ve employed marketing affiliates, including their commission is important. 

This may include costs related to items that you’ve sent them in order for them to market your product or service, as well as their commission from actually producing the Ad/Ad-generated sales.

Clicks and impressions

Depending on where you posted the ad (television, social media, billboards), you will measure impressions and clicks differently. 

In fact, impressions and clicks vary between social media sites! You will want to turn analytics on if you’ve released an ad on any social media site to give yourself a full picture of how the ad is performing.

TIP: ROAS is usually expressed as a percentage, but it also can also exist as a ratio.

ROAS vs. ROI: What’s The Difference?

As said before, ROAS is the financial return that you generate from an Ad, but this differs from ROI (or return on investment). 

ROI is related to the financial return of an investment as a whole. Here is a table detailing the difference:

Factor	ROAS	ROI
Focus	Advertising and marketing	General investments
Big-picture	Managing advertising campaigns	Monitoring investments (real-estate, stocks, etc.)
Application	Marketing (especially digital marketing)	All industries, but is more broad

So, the question is, should you use ROAS or ROI? 

If you’re considering the profit from different kinds of investments, I recommend investigating how ROI can improve your business or personal finances. 

However, ROAS is specifically tailored for marketing and takes all aspects of advertising into consideration.

What is a good ROAS?

A good ROAS is heavily dependent on the platform that you are advertising on. For example, Google Ads users report an average of $2 in sales for every $1 spent on advertising. 

Additionally, this number tends to be industry-specific, so researching the best ROAS for your field is a smart idea.

However, in general, a good ROAS is a positive one. In other words, your ROAS should reflect that you’re making more money than you are spending on advertising.

If your ROAS is over 200%, that is considered to be outstanding!

How to Increase Your ROAS

ROAS can be increased in many ways, but here are a few that are impactful:

Target the correct audience: Making sure that your ad is being watched or interacted with by the right audience is a necessary step in increasing your ROAS. 

If it is possible, consider the kind of person who is more likely to buy your products and target your marketing to that demographic. 

Spend time on your ads – be creative: We’ve all seen an ad that has made us cry, seemingly out of nowhere (…just me?).

Creative and engaging ads take time to make. If you own a business, you might want to consider employing a creative person to assist with your advertising.

This will guarantee that your ad is memorable to the right people.

Keyword optimization (search ads only): If you’re advertising using Google Ads, your keywords are your best friend.

Narrow them down and make sure they are words that you’d expect your customers to use that would generate a display of your ad. 

If you choose to use Google Ads, you can find more information about keywords here.

Final Thoughts

You’ve reached the end of this article – congratulations! ROAS can seem daunting at first, but as you’ve come to realize, it can be broken down into smaller, more manageable steps. 

Now, you’re ready to implement the information and helpful tips in this article into your marketing ventures in the future!