Return on Ad Spend: Everything You Need to Know

Of course, there are many marketing metrics that factor into the success of a campaign–return on investment, revenue, conversion rate, and more. Return on ad spend, also known as ROAS, is just one of them, but it is nevertheless important. How do you know if you have a good return on ad spend? 

In this post, we take an in-depth look into the return on ad spend to give you a better understanding. We’ll dive into what it is, what it means for your business, how to measure it, and ways to improve it. 

• What is return on ad spend?
• What is the difference between ROAS vs. ROI?
• How does return on ad spend measure ad performance? 
• What is a good return on ad spend?  
• How to calculate return on ad spend
• How to improve your return on ad spend

What is return on ad spend? 

Return on ad spend (ROAS) is a crucial marketing metric that evaluates the effectiveness of advertising campaigns. It measures the revenue generated for each dollar spent. As a result, you track the performance of your ads and optimize your marketing strategies. 

In other words, ROAS provides insight into where and how to invest your ad budget for optimal results.  

For instance, if you earn a revenue of $8 for every $1 spent, your ROAS will be 8:1. A ROAS of 2:1 means you have earned a revenue of $2 for every $1 spent. Ideally, the higher the return on ad spend, the better.

ROAS vs. ROI

Return on ad spend and return on investment are both marketing metrics that measure performance. 

However, return on investments (ROI) looks at the overall performance of various marketing efforts. Return on ad spend tends to measure the performance of a single advertising campaign. 

Unlike ROAS, which measures the revenue generated per dollar spent, ROI calculates the return on the entire investment versus its cost. 

To calculate return on investment, you’d use this formula: 

Net income (revenue minus cost of investment) / cost of investment x 100

For instance, if you invest $1,000 and generate $10,000, your ROI would be: 

($10,000-1,000 / 1,000) x 100 = 9,000/1,000 x100 = 900% 

Return on ad spend is exclusive to advertising, whereas the return on investment could be used to assess the effectiveness of other business initiatives. For instance, you may use ROI to measure the impact of buying a piece of equipment for your business. Did the equipment help increase revenue and make up for the initial investment cost? ROI would be one way to assess your investment.

Here are some key differences between ROAS and ROI:

Purpose

• ROAS – Measures revenue generated from money spent
• ROI – Determines the net income generated from an investment

Scope

• ROAS – Focuses on the effectiveness of a specific ad campaign
• ROI – Looks at the bigger picture of whether the campaign is profitable 

Type of Investment

• ROAS - Measures performance of advertising investment
• ROI – Evaluates the performance of any investment (not necessarily advertising)

Reliability

• ROAS – Even when ROAS indicates a high conversion rate, if the cost of conversion is high, it may translate to losses for the business
• ROI – On the other hand, ROI factors in the cost of the investment; hence you can rely on it to know whether the campaign is profitable or not

Results

• ROAS – Indicates effectiveness of advertising campaign
• ROI – Evaluates the profitability of an investment

Insights

• ROAS – Determines which advertising tactics are most effective
• ROI – Shows which strategies are most profitable

How does return on ad spend measure ad performance? 

The definition of ROAS makes it sound simple–estimating the amount of revenue received from a specific ad campaign–but it's not always straightforward. For example, a customer who views an ad and completes the call to action on the landing page, such as downloading an eBook, might not convert right away. 

Sometimes, they might convert a few months later. Without a custom solution to track and tie the conversion to the initial action (viewing the ad), monitoring the effectiveness of ad campaigns becomes increasingly difficult. 

Fortunately, CRM and ads software help tie together a customer's data across different touchpoints for better tracking. This way, once a customer clicks on an ad, you can monitor their brand interactions–like making a purchase–and link it to the ad campaign. 

Note that when calculating return on ad spend, you need to factor in all the expenses incurred, such as the cost of bid management tools, labor expenses, and landing page design services. You should then divide the gross revenue from the ad campaign by the total cost.

What is a good return on ad spend?  

A good return on spend depends on your goals. A good ROAS for a campaign to increase brand awareness is likely different from ROAS for a campaign to drive conversions. 

Reports indicate that the average ROAS across industries is 2.87:1, meaning the average revenue for every $1 spent is $2.87. However, this varies significantly in individual sectors. Generally, a good ROAS is from 3:1, though some businesses may require as high as 10:1 ROAS to be profitable. 

Ideally, a business with higher profit margins can survive a low ROAS. On the other hand, with smaller margins, there’s a greater need to keep advertising costs down. In this case, you’d want a higher ROAS. In addition to industry and campaign goals, you’ll also want to consider the marketing channel when looking at return on ad spend. 

What is a good ROAS on Facebook?

Ideal return on ad spend varies from one channel to the other. For instance, Facebook ROAS is relatively higher than other popular ad channels like Google Shopping, Instagram, and Amazon. According to a recent benchmark report, Facebook's return on ad spend stands at 10.69.

What is a good ROAS on Google?

Businesses can earn even up to $8 for every $1 spent on Google, but aiming for at least 4:1 ROAS is acceptable by most standards. Generally, the ratio varies pretty often, as other reports have indicated a benchmark of 13.76:1 for Google paid search. The higher you aim, the better. A higher ROAS may justify a higher Google Ads budget, allowing you to drive better results for the company.

How to calculate return on ad spend

To calculate your return on ad spend, divide your total conversion value by the total advertising costs. Below is the formula. 

Return on Ad Spend Formula

ROAS = Total revenue / Total ad spend

For instance, if your total conversion value is $10,000 and your total ad spend is $2,000, your ROAS would be as follows: 

$10,000/$2,000 = 5:1

This means you earned a revenue of $5 for every $1 spent on the ad. When calculating ROAS, you may want to track other closely related metrics such as: 

Average order value

Abbreviated as (AOV), the average order value is a metric that measures the average value of every order over a given period. This is calculated by taking the total revenue and dividing it by the number of orders.

Average order value = Revenue / Number of orders

Total revenue

Also known as gross revenue, total revenue refers to the recurring and non-recurring revenue your business generates from selling products and services. If you are an ecommerce company, for example, you would calculate your total revenue by taking the price of each product and multiplying it by the number of those products that are sold. 

Ad spend

Ad spend is the amount you spend on a particular ad set in a certain period of time. It may include ad placement costs and bidding costs. If you are calculating your return on ad spend, you’ll need to first know your total ad spend. 

Conversion rate

This shows the average number of conversions generated from ad interactions, expressed as a percentage. To calculate the conversion rate, divide the number of conversions by the number of visitors. For instance, if out of 1,000 ad interactions, 50 convert to make a purchase, then the conversion rate would be 5%. The formula would look like this–50 conversions/1,000 interactions x 100 = 5% conversion rate. 

Cost-per-click (CPC)

The amount you spend per click is known as cost-per-click. Usually, this is a pre-set amount. When you set up ad campaigns, you cap the maximum amount you are willing to pay per click on the ad.

How to improve your return on ad spend

Improving your ROAS can be beneficial in many ways. For example, it can lower your ad spend and optimize your conversions. These tips can help you tweak your campaigns for better results and return on ad spend.

Use audience targeting 

Consider narrowing down your audience to maximize conversions per dollar spent. With advanced audience targeting, you can reach audiences based on their age, marital status, interest, location, behavior, and more.

Optimize your website for mobile 

A mobile-friendly website is crucial in boosting conversions. More than half of your website visitors browse from their mobile phones. Optimizing your website for mobile viewing can provide a better user experience to mobile visitors and reduce bounce rates. 

Use geotargeting 

If you have a brick-and-mortar business, geotargeting can help target customers within your location. Targeting audiences in your store's proximity with relevant ads can encourage more store visits and raise the chances of converting them. 

Optimize landing pages 

A customer who clicks on your ad already shows they're interested in your offer. However, a the landing page design, copy, loading speed, and other elements influence whether or not they’ll buy. Hence it's essential to have a landing page that offers what the ad promises and is designed to increase conversions. 

Refine your keywords 

Target the most relevant audience and increase conversions by using relevant keywords. For instance, long-tail brand-related and location-specific keywords (for businesses with physical stores) can help you reach potential customers who are highly likely to buy from you. 

Return on ad spend metrics can help you eliminate search ads that aren’t performing. For example, you can get rid of keywords that may be increasing ad costs without driving conversions and replace them with more relevant keywords.

Experiment with ad placement

Strategic ad placement is another effective way of improving your ROAS. Experiment with different types of ads and placement options. For instance, you can use banner ads and newsletter placements. Analyze how each performs and focus on the best. Similarly, you could try various ad options for social ads–like newsfeed or in-stream ads – to find the ones that maximize your ad spend with higher conversions. 

Promote seasonal deals 

Your ad copy should be more flexible, adapting to seasons for a better return on ad spend. Maximize your conversions by customizing the ads with relevant holiday deals whenever there's a holiday. This way, you can reach people looking for holiday deals who are highly likely to convert.

Work with an agency 

Effective advertising campaigns require close monitoring of key metrics. Measuring return on ad spend is especially crucial because you can identify which ads bring in the most revenue, and which do not. 

Generally, you should maintain a good ROAS that aligns with your advertising campaign goals. You can easily achieve this by implementing the tips we have shared.

Whether you need advice on maximizing your return on ad spend or refining your overall digital marketing strategy, we can assist. At Goodway Group, we are passionate about collaborating with ambitious brand marketers to help them navigate challenges. Let us know your concern by contacting us today.