Why Marketers Need to Understand ROAS Marketing

Are you optimizing your paid advertising budget?

Data Standardization Worksheet

This worksheet begins with the standardization of your performance data. We’ll walk you through how to combine these mismatched data sets in a step-by-step process so that every metric is speaking the same, common language. With all of your data standardized, it’s easier to locate the strengths of each platform and hone in on ways to optimize campaign performance.

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Michael Jung, VP of Product Management and Technology, Precision Reach

ROAS Marketing

In marketing, “ROAS” refers to “Return on Ad Spend.” The ROAS meaning is pretty simple: It’s the amount of money you make compared to the amount of money you spend on advertising. In ROAS marketing, you pay attention not only to your ROAS (which is very similar to ROI), but whether it’s going up or down.

In marketing, there’s often an inflection point. If you spend $10,000, you might get in $100,000 in sales. But if you spend $20,000, will you get $200,000? Because of market saturation, $20,000 may only yield $150,000. Your ROAS is what tells you if more money is still yielding you more results and when the amount of money you’re spending on marketing is no longer effective.

ROAS can also be used to compare different marketing channels. Direct mail might be getting you $2 on the dollar, but email might be getting you $5 on the dollar. All these comparatives are critically important when developing a marketing campaign.

Digital marketers will use ROAS marketing throughout their marketing strategies to optimize and improve upon those strategies, to determine how much of their budget should be allocated toward marketing, and to determine where those advertising dollars would be best spent. With accurate ROAS accounting, digital marketers can make educated, informed decisions.

But ROAS can be a challenge, especially with multi-channel marketing campaigns. Because ROAS can vary by channel, but the buyer’s journey may cross multiple channels, marketers today need to be particularly diligent with their analytics and tracking. Intelligent analytics suites can make it easier for marketers to track their ROAS, especially across multiple platforms and multiple advertising strategies.

ROAS Formula

Unlike many advertising formulas, ROAS is actually very easy to calculate. You can use an ROAS marketing calculator if you don’t want to do the calculations yourself. But the ROAS formula is also very simple: [revenue] / [costs] = ROAS.

So, if you made $10,000 and your advertising cost $100, your ROAS is 1,000%. ROAS is expressed as a percentage.

As you can see, it’s really not that hard to calculate ROAS. The bigger challenge is making sure that the number is valuable. For instance, you might have three different advertising campaigns going. How do you know which one is actually contributing to your income? If you’ve launched multiple strategies at once and seen gains, how do you know what is or isn’t working?

That’s where split-testing usually comes in, where you target different audiences with different methods and determine which one has the highest ROAS. It’s important to make sure that the numbers you have aren’t just accurate, but that they are actionable; if you have numbers that aren’t tethered properly to your strategy, they won’t be helpful.

An analytics platform will be able to calculate your ROAS for you. ROAS marketing is often used in place of other types of ROI calculation because it directly shows the correlation between the amount that you’re spending and your results. But it can also lose some nuance, because it is such a simple calculation.

Keep in mind that there are differences between ROAS and ROI. ROAS directly looks at advertising spend; the amount that you’re spending on a given advertising platform. Meanwhile, ROI includes labor costs and other administrative costs in addition to advertising. You may need to look at both to have a more holistic view of what you’re receiving for the cost of your advertising dollars. You may also want to use ROAS to pare down to exactly how much money you’re making for each dollar spent.

What Is A Good ROAS?

There’s no universal answer to “What is a good ROAS?” ROAS depends on many things. Some industries have better ROAS than others. Some ad platforms have better ROAS than others. ROAS optimization often takes into account the organization’s previous performance. If your ROAS is going up steadily, then you’re doing well; if your ROAS is going up, you may have reached saturation, or you may need to change up your strategies.

When you’re comparing ROAS on multiple platforms, you can easily see which platform has better spend. But it can be difficult to run all these calculations yourself. An Advertising Intelligence platform can help you easily collect and analyze information, while also performing ROAS optimization for you.

Advertising Intelligence platforms make it easier to automate the process of advertising — and thereby making it possible for marketers to focus more on their product and their broader strategies. But the bottom line is that a “good ROAS” isn’t going to be universal to every company. As long as your performance is going up period-over-period, you’re likely doing well — and as long as you’re focusing on the highest ROAS opportunities, you’ll be able to optimize your strategies.

ROAS vs. ROI

When it compares to comparisons, there are two things you might want to consider: ROAS vs ROI and target ROAS vs target CPA.

ROI is very similar to ROAS, but ROI includes all the costs of the advertising expense, whereas ROAS marketing only considers the direct costs on the advertising platform. ROI is going to give you a bigger picture result, whereas ROAS is going to give you a more targeted result. You should generally look at both, but many marketers find ROAS to be a better or more accurate metric when making optimization decisions.

Regardless, your Advertising Intelligence program should be able to deliver both ROI and ROAS marketing information to you, so you can have more accurate analytics across all channels.

CPA, on the other hand, is very different from ROAS. CPA refers to Cost Per Acquisition. An example is the easiest way to understand the difference. Your cost per acquisition might be $5 per customer. But your advertising spend might be $5 for every $5, if each customer only spends $5. CPA tells you how much it costs to acquire a customer, but ROAS includes how much each customer spends — the actual revenue that’s involved. Both target ROAS and target CPA can be used to guide your decisions.

Target CPA

Target CPA (cost per acquisition) is the amount that you want each acquisition to cost. If a customer’s lifetime value is $2,000, you might want your CPA to be below $200. But if your customer’s lifetime value is only $200, you may want your CPA to be below $5. Your target CPA guides your decisions when it comes to advertising spend, much as ROAS would.

An intelligent advertising platform would be able to automatically calculate your ROAS formula Google Ads, your target CPA, and your ROI. From there, you just need to decide whether you’re more concerned with your ROAS Google Ads or your Target CPA Google Ads.

Importantly, your target CPA and target ROAS are both targets; they’re used to optimize your strategies. They aren’t what you’re currently experiencing, but rather what you’re trying to target. When it comes to Google, your target CPA can tell you how much you’re willing to spend on advertising, and how much you’re willing to spend per click.

If, on average, a user needs to click 30 times before they make a purchase, and your target CPA is $15, then you know that you can’t spend more than $0.50 on each click. This is an over-simplification, but it’s generally how the process works.

Average ROAS

ROAS can be used to compare different advertising platforms. When you look at average ROAS on different platforms, such as the average ROAS Facebook ads, you know two things. One, how Facebook performs in comparison to other social media platforms. And two, whether your advertising stacks up. So, what is a good ROAS Facebook?

The average ROAS on Facebook is about 600% to 1,000%. That’s very good — most people have good results when dealing with Facebook advertising. Comparatively, the average ROAS on Google Ads is 200%. So, we can see right off the bat that the average ROAS on Facebook is better.

Why is that? Well, there are a few reasons. Facebook ads can be targeted more directly to individuals, individuals may be more receptive to advertising on FB (it shows up in a feed along with other posts, rather than being a visible ad), and individuals are often being marketed to by brands and companies that they already know.

Knowing the ROAS of an individual platform naturally helps you decide which platforms are going to be best for your future advertising campaigns.

ROAS Definition

Let’s take a look at the ROAS definition once again: ROAS is the Return on Advertising Spend. It is a critically important metric that many businesses find important to their advertising dollars. Let’s say your ROAS, however much you spend, always returns back 300 percent to your business. There’s practically no reason not to continue increasing your advertising dollars — until you find that number starting to decrease.

ROAS spending can be used to compare different platforms and strategies. It can even be used to compare different products and services; perhaps you just make more advertising your flagship products than your peripherals. What you do with your ROAS marketing data is up to you, but the amount of information it gives you on a surface level and more in-depth is critical.

But the problem with ROAS is the same problem that happens with many recurring data metrics; it’s hard to collect and analyze this data on your own, especially through multiple channels. This is where an advertising intelligence program can help. Artificially intelligent advertising platforms are able to collect and analyze your data for you, telling you what the smartest decisions are for your advertising spend.