How To Calculate ROAS: Formula and 5 Tips to Boost ROI

Introduction

Your e-commerce business’s Return on Investment (ROI) is perhaps the most important metric for the success of your eCommerce venture. 

However, ROI can only tell you so much. It gives you the total return on all your investments but not the value that each investment brings to the table. 

Your investment in advertising is likely one of the largest investments you’re making, right behind product and personnel. Your ROAS can provide you with a look at this specific part of the pie. 

ROAS offers deeper insight into what’s leading conversions and the precise revenue generated by ad-driven customer action.

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What Is ROAS? 

Return on Ad Spending (ROAS) is an eCommerce marketing metric that measures the revenue generated by each dollar spent on advertising. 

For each dollar you spend on ads, how many dollars do those ads send back to you? ROAS is similar to ROI. The key similarity is that they both measure the return on an investment. ROAS is simply more specific: Think of it as your return on advertising investment. 

At its core, ROAS measures the effectiveness of your ad campaigns. After all, the purpose of an ad is to see a financial return. An effective ad not only gets clicks but also drives conversions. The more effective your ads are, then the greater return you’ll see — and the higher your ROAS will be. 

The higher your ROAS is, the better it is for your bottom line. 

What Is the Difference Between Return on Ad Spend and Return on Investment?

ROI measures the overall success of your company’s investment strategy, whereas ROAS takes a measurement of a particular investment spending tactic. 

ROI generally looks at the long term. ROAS can certainly be applied to long-term goals, but it can also have short-term applications when assessing your marketing objectives. It’s safe to think of ROAS as more of a short-term metric and ROI as more long-term. 

ROI is the big picture, ROAS is focused on one corner of that big picture. 

Understanding Advertising Costs: What Is a Good ROAS?

Higher is better, but how high is high enough? What characterizes a “good” ROAS? 

The rule of thumb is 4:1: For every dollar spent on advertising, there’s a return of four dollars. If you’re unsure where to set your ROAS growth goals, aim for 4:1 or better. However, ROAS goals can vary from platform to platform. For example, an average ROAS for Google Ads is 2:1. 

Unfortunately, there is no one size fits all answer here. A good ROI for one business or industry might be subpar for another. Even average ROI varies pretty dramatically across industries. 

If your business operates in a high-income industry with high margins, then your ROAS should be very high. If your business operates in a competitive industry with lower margins, your ROAS will be lower.

How Do You Determine ROAS?

So how do you read your ROAS in context? Determine the average ROAS for your industry through market research. 

Without any context, you can still utilize your ROAS. If you can see that your conversion rate is good, but your ROAS is less than one (100%), then something is wrong with your marketing strategy. 

Typically, this means one of two interpretations: Your advertising expenditure is too high and/or ineffectively allocated, or you’re losing potential income by pricing your product too low. Luckily, both of these issues are relatively easy to address. 

Consider the market you’re working within and compare your product to similar products. Is your product priced reasonably and competitively? Don’t undersell yourself and the value of your product.

If the answer is yes, you can safely rule out option two. If the answer is no, take this issue away from your marketing team and put it in the hands of your decision-maker.

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How Does Your ROAS Impact Your Advertising Strategy?

Your ROAS should have an impact on your advertising strategy. If you find your ROAS is very low, yet your prices are competitive, you need to reassess your advertising spending in terms of quantity and quality. You may simply be overspending on marketing campaigns. If one arm of the campaign is doing all the heavy lifting, consider: would the expenditure and return associated with only that arm create a positive ROAS? If so, you’re overspending in all other areas, so trim the excess. 

What about the quality of your ad spending? When you consider your online advertising, from social media marketing efforts like Facebook ads to Google ads and other digital advertising  efforts like email ads, do you know which avenue offers you the highest click-through rate? You want to meet your consumers where they’re already trying to meet you. Examine your click-through rate on different tactics to get a sense of what makes a high-quality advertisement for your business.

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ROAS Calculation Explained: What Is the ROAS Formula?

The ROAS formula is straightforward. You just need to know your total ad spending and your total revenue collected from advertising. 

The most difficult aspect of determining your ROAS is determining how much of your total revenue was the result of paid advertising efforts on your company’s behalf and how much was not. Google Analytics can help you make that distinction.

ROAS equals your total conversion value divided by your advertising costs.

• (Revenue from advertising / cost of advertising) * 100

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How Can You Get a High ROAS and ROI?

Low ROAS got you down? Don’t fear. 

A lower ROAS isn’t a death sentence for your ad campaign. It’s possible that low ROAS is just a sign that your advertising efforts (or a specific ad) just need a little polishing. Let’s talk about some pro tips to drive up your ROAS and, in turn, your ROI. 

1. Explore a Range of Digital Marketing Strategies

How many digital marketing strategies are out there? More than you could use in a day. To remain competitive, all eCommerce businesses should be present across multiple digital channels. 

If you’re not seeing the ROAS you want from your current channel, why not try a new one? If you’re not connecting with your audience via Facebook ads, why not try influencer marketing? 

Other types of digital marketing strategies include social media marketing, influencer marketing, email marketing, affiliate marketing, pay-per-click, and SEO. Don’t be scared to explore new channels. 

2. Take a Unique Approach To Google Ads

Google Ads is a complex platform. Using Google Ads to amplify your marketing campaigns is a wise strategy for your marketing team. Google offers a Smart Bidding service, which is an effective method to optimize advertising campaigns. 

To best utilize Smart Bidding, your business should approach it with a well-thought-out campaign plan and the most consumer data you are able to provide. The more accurate data you can provide, the better Smart Bidding will be able to optimize. 

Target ROAS (tROAS) is just one of Google's many available Smart Bidding strategies. These are automated strategies that Google will automatically optimize for conversion for you. 

To use tROAS, you must assign values to different conversion actions. The conversion values you assign should reflect the revenue generated by your ads. tROAS is a useful tool for you if conversions from your Google Ads create a direct return on investment by selling physical products or services online. 

tROAS may not be the best tool for you if your business sells digital downloads or offers free tools since your Google Ad conversions won’t generate direct ROI. 

3. Know Your Profit Margin

This one is extremely straightforward: You need to know your profit margin. 

Profit margin refers to the remaining profit generated by each sale after expenses have been met. It can be calculated by dividing the net income by the net revenue:  

Profit Margin = Net Profits (or Income) / Net Sales (or Revenue)

Internationally, profit margin is the standard means of measuring the profit-generating capacity of any business — and, therefore, that business’s likelihood of survival and the viability of an investment.​

4. Aim for the 4:1 ROAS Benchmark

As we mentioned before, the most widely accepted benchmark for a “good” ROAS is 4:1. Your ad revenue should be four times the cost of ads. 

If you discover you’re lucky to break even on your ad spending, something has gone wrong. As the first step in increasing your ROAS, aim for the 4:1 benchmark. This benchmark can also be reached by spending less on ineffective ad channels, not just by making more sales. 

5. Start Tracking ROAS Early To Compare With Future ROAS Metrics

The only thing better than thorough data collection is thorough data collection over time. The best time to start tracking your ROAS was yesterday, but the second best time is today. 

When you build up a history of ROAS data, your marketing team will be better able to analyze trends in your marketing over time. They’ll be able to look for external and internal factors. 

Do your ads perform better during certain times of the year every year? Are you seeing an overall increase or decline in ROAS year over year? How do small changes in your marketing strategy affect your ROI long term? 

You can answer these questions with data and time. 

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ROAS: An Essential Tool for Any Marketing Campaign

Your return on ad spending is a critical metric your marketing team needs to be aware of. With each new dollar spent on advertising, keep track of exactly what that dollar brings back to you in order to prevent overspending on advertising. Your overall ROI depends on maintaining a high ROAS. Any marketing campaign can benefit from understanding, analyzing, and applying the data reflected by the ROAS. 

Need help applying what you’ve learned? Prismfly is excited to help you boost your conversion rates, improve your ROAS, and increase your ROI. We’re already helping businesses like yours grow their e-commerce sites, so what are you waiting for?