Calculating return on advertising spend (ROAS) is a critical marketing metric. When marketers know the ROAS across individual paid ad campaigns, they can quickly adjust or abandon efforts that are delivering low returns on ad spend — and expand or extend the campaigns providing a good ROAS.
Understanding how to calculate the return on ad spend is also important for helping a business determine its true customer acquisition cost (CAC). You’ll learn more about the relationship between ROAS and CAC later in this piece. Also, you’ll get an overview of different tools for calculating ROAS and tips for how to improve your ROAS.
Let’s kick things off with a quick definition of ROAS.
Simply put, a return on ad spend is the amount of money earned by an advertising or marketing campaign matched against the amount of money spent on that campaign.
If math isn’t your strong suit, don’t worry: calculating your return on ad spend is easier than you might think. You simply take the amount of revenue generated by your ad campaign and divide it by the amount spent on the campaign to produce a ratio or percentage. The higher the ratio or percentage, the more successful the campaign!
Here is a simple ROAS calculation example: A company spends $5,000 on an ad campaign in one month. The campaign generates $25,000 in revenue during that month. To calculate ROAS, the company divides the $25,000 in revenue by its $5,000 in ad spend, and the result is $5.
In short, every dollar the company invested in ad spend for this one-month campaign generated $5 in revenue. That’s a return on investment (ROI) of 500% — or a ratio of 5:1. (Nice!)
You can easily find calculator tools online that can help you calculate ROAS. There’s even a ROAS formula for Google Ads that you can utilize for your digital campaigns.
You can also turn to your Microsoft Excel software program for the task of calculating ROAS. Check out this resource on HubSpot for a step-by-step guide on how to set up and use the following ROAS formula in Excel: (sales revenue - marketing cost) / marketing cost = ROI.
Knowing your ROAS is valuable, but it doesn’t indicate if your ad program is profitable or what your profit margins might be. For that, you must calculate the break-even ROAS.
You can find calculator tools online for handling this process as well. But the break-even ROAS formula is simple to work out by hand, as long as you know your average profit margin as a percentage.
The break-even ROAS formula looks like this:
break-even ROAS = 1 / average profit margin %
So, if you have an average profit margin of 70%, the break-even ROAS is 1 / 70%. That’s 1.4, or 140%. If your ROAS falls below this figure, your ad program is losing money.
As you’ve no doubt gathered by now, using ROAS as a marketing metric can provide valuable insight into the return that you’re generating for every dollar you spend on ads.
Importantly, ROAS analysis can help you identify poorly performing advertising and marketing campaigns, so you can move swiftly to switch up tactics and get on the path to achieving better outcomes. A good ROAS can also help you identify ad campaigns that perform well, allowing you to replicate the successful elements of those efforts in future campaigns.
Knowing how to calculate your return on ad spend and keeping the target ROAS number in focus can help you plan and optimize your digital ad campaigns, enhance your Google Ads bidding strategies for various campaign types, and develop more effective marketing strategies, too.
What is a good ROAS? Generally speaking, if your ads are producing enough revenue to cover your campaign costs, that’s a positive sign. If they’re not, you’ll want to figure out how to improve ROAS. And even if your ads are generating healthy revenue, it never hurts to aim higher — provided you don’t overextend your resources in the quest for a small bump in revenue.
In either case, the following strategies can help you enhance your ROAS:
One of the easiest ways to improve ROAS is by optimizing another key marketing metric: cost-per-click or CPC. Optimizing CPC typically means reducing CPC — and one way to do that is by making sure your ads feature compelling content, so you get more clicks. For example, if your CPC is $10 and you can double your click-through rate by using more relevant content, you could lower your CPC to $5.
Testing new keyword combinations, using long-tail keywords (longer, more specific phrases), and including negative keywords (to prevent your ads from appearing in search queries that are irrelevant and waste your ad spend) can also help lower your CPC. You can reduce costs further by avoiding highly competitive keywords and focusing on lowering your keyword bids.
Conversion rate optimization (CRO) is another way to improve ROAS. There are multiple touchpoints between your website landing page and where you measure a conversion, whether that’s a sale, a newsletter sign-up, or a demo booking. CRO focuses on making the customer journey between those touchpoints as seamless as possible and helps reduce friction so that your ad results in a customer rather than just a click-through.
CRO best practices include:
Getting your customers to buy more when they order online is another way to improve ROAS. If your average order value (AOV) is higher, the return on ad spend should be higher, too. To calculate AOV, take the total revenue from all sales and divide it by the total number of orders.
Total revenue from all sales ÷ total number of orders = AOV
You can boost your AOV by:
E-commerce sites can also increase AOV by emphasizing customer service. Make it easy for customers to contact you by offering a full array of contact options, including phone and email support. Companies that excel at customer service — and boosting their AOV — also typically offer a 24/7 live chat option.
It’s worthwhile double-checking exactly how your revenue is being attributed. After all, if your ad campaign is generating sales, you want to make sure marketing is getting full credit for every one of those sales. Whether you use first-touch, last touch, or something in between, you should review your attribution model regularly.
To improve ROAS, you want to reduce your cost of acquiring customers. Marketing automation can help on this front by streamlining marketing efforts, improving lead generation, email targeting, and more. You can also reduce CAC by testing and improving your ads so that they include effective content that focuses only on the customers you want to reach or retargets existing customers.
You can save time and money and improve the effectiveness of your ad campaigns by split testing or A/B testing your ads to a small audience to determine the best version to send to a larger target audience. A/B testing involves using the same ad with minor changes sent randomly to a test audience to experiment with copy.
Confirming that you’re sending ads to the right audience can also help you improve your ROAS. Be sure to use the latest market research and analytics, demographics, and behavioral factors to define your target audience and develop campaigns likely to resonate with them.
In truth, there’s more to having a “good” ROAS than just making sure your ad spend is covered. Your actual return on ad spend will depend on the type of business you operate, what you sell, who you sell it to, who your competition is, and which ad platform you’re using.
A good average ROAS is considered to be around 3:1 or 4:1, or a 300% or 400% return on ad investment. However, ads that run on the Google platform might generate three or four times that ROAS.
ROAS and ROI are not the same metrics. Here’s a quick look at how they’re different:
Both metrics measure profitability by viewing costs against revenue; however, think of ROI as measuring the success of your entire investment in marketing and ROAS as measuring the success of your ad or ads.
One tool you may already be using is Invoca for marketing. Invoca’s AI-powered conversation intelligence platform allows you to capture attribution data from phone conversations and combines it with your other martech tools to fine-tune your advertising and marketing campaigns and maximize ROAS.
How can you improve ad campaigns with call tracking? Call tracking empowers your marketing team with valuable conversational insights that allow you to personalize the customer journey and redirect ad copy to appeal to more customers. These insights are contained in transcripts and actual call recordings. Invoca’s AI capabilities also help marketers identify trends in real time.
Invoca’s solution can be used to track online and offline conversions in Google Ads and other commonly used ad platforms. It also provides marketing and sales teams with true performance measurement by enabling better attribution for every customer touchpoint and action in the call center.
By helping to improve your ad campaigns and delivering full marketing attribution for every media channel you use, Invoca can help you calculate your return on ad spend more confidently and accurately — and understand how to improve it.
Want to learn more ways to improve your ROAS with Invoca? Check out these resources:
Download our Ultimate Guide to Reducing Wasted Marketing Spend to learn how you can lower your CPA while improving marketing campaign performance.