What is Return on Advertising Spend (ROAS)?
by Basheer Badran
Return on Advertising Spend, ROAS for short, is a marketing metric that measures the efficacy of a digital advertising campaign.
That’s why advertisers use ROAS to judge the effectiveness of the money they spend on advertising. You can calculate ROAS by dividing the revenue generated from ads by the cost of those ads.
Return on Advertising Spend is similar to ROI (return on investment), but it only looks at the monetary return from a specific ad campaign.
In contrast, ROI measures the return of a larger investment. You would use this metric to measure the return on a marketing campaign that included ads as well as other marketing expenses, e.g. working with an influencer or hiring a web developer.
Why is ROAS important ?
Because it gives you a quick look into profitability.
ROAS data from all campaigns is used to drive future budgets, and marketing strategy. E-commerce organizations can make accurate judgments about where to invest their ad expenditures and how to become more efficient by keeping a close eye on ROAS.
When you track ROAS over the course of an ad campaign, you can see how it performs over time. This might help you figure out if the campaign is bringing in the revenue you expect it to, and whether you should renew it or pivot quickly to prevent wasting more of your advertising investment.
ROAS is often expressed as a ratio. For example, if you generated $800 in revenue from a Facebook Ads campaign that cost you $100 to run, then your ROAS would be 8:1, representing $8 made for every $1 spent.
What is a good average ROAS?
There’s no right answer to this question. That’s because a “good” ROAS varies significantly from business to business, campaign to campaign, platform to platform and industry to industry.
According to a study by Nielsen, the average ROAS across all industries is 2.87:1. This means that for every dollar spent on advertising, the company will make $2.87. In e-commerce, that average ratio goes up to 4:1.
Well someone might ask: “Alright, tracking ROAS seems like a lot of work. Isn’t it possible for me to simply monitor my click-through rate or conversion rate and utilize that data to optimize my online advertising?”
Technically, the answer is yes, but it might not be enough for you to make the right decision.
It’s good to keep in mind that the goal of online advertising is to make money, not to drive traffic or even conversions. If your online advertising isn’t generating revenue, you need to make a change. However, if you aren’t tracking ROAS, you won’t know where to make changes.