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If you’ve ever used paid advertising to run online ads, then you’ve probably heard of the term ROAS. But what exactly does it mean, and why is it so darn important?
Just like in any industry, digital marketers are always trying to get the best return on their investment. It’s only natural to want to spend as little money as possible. However, in order to understand what kind of return you are getting from your investment, you need to know how much you are spending in the first place. Only then can you get a good idea of how successful and profitable your campaign is.
To help you become a master of the ROAS metric, let’s start with a definition and break down its formula.
To put it simply, the return on ad spend (ROAS) metric can be defined as:
A marketing metric that measures the efficiency of a paid marketing campaign. The metric can be used to compared campaigns against each other to see which is the most profitable and efficient. This information can help marketing managers decide where to invest their ad budget to get the best return.
As you can see, the return on ad spend metric is all about efficiency. A common problem for many digital marketers is deciding if they should increase their ad spend or not. The second problem is that if they have various ad campaigns running which ones should receive extra funding? To help pick the campaign that is likely to return the most money, the ROAS metric can help.
Now you know exactly what the return on ad spend metric is, how do you calculate it and use it to make an informed decision? Well, it’s time get your calculator out and start crunching some numbers.
The first thing you need to know about your paid ad campaign is how much you have spent on it. For example, if you’re running a Google AdWords campaign then you should be able to check the total ad spend for the life of the campaign or for a specific month. This amount will include every penny you’ve ever spent on that campaign and therefore will be the “total ad spend”.
It’s important to know that this figure will be just be the amount you have spent on advertising. It won’t include any additional fees such as the cost of tools, management fees and wages. If you’re trying to work out how profitable paid advertising is for your business as a whole, then you’ll want to make sure you include these expenses.
Now you know how much you’ve spent on your campaign it’s time to see how much you’ve made. The next crucial figure in the ROAS metric is the gross revenue. This is calculated by working out how much revenue your paid advertising has brought in. If you have conversion tracking set up with AdWords, then this should be a very simple task. However, if not, then it’s going to take you a bit longer to find the correct amount.
Once you’ve found the total amount of revenue brought in by your advertising campaign, we can finally work out the calculation. The calculation is simply:
The result can be interpreted as the amount of revenue you bring in for every $1 spent. As long as the number is above $1, then it’s a profitable campaign. Here’s a quick example.
John spends $2,000 on his AdWords campaign and brings in a total of $10,000 from these paid ads. The return on ad spend can then be calculated as: $10,000 / $2,000 which equals $5. This means that for every $1 spent on the campaign, it will bring in $5 of revenue.
This might all seem very interesting, but what if you want to just calculate the profit? The term return can mean different things to different marketers. Some view return as revenue, while others view it as pure profit. Whatever you view return as, there is a calculation for both scenarios.
If we take the calculation above and change the campaign revenue to campaign profit we get a new calculation that looks like this:
The result from this calculation can now be interpreted as the amount of profit for every $1 spent on advertising. Unlike the other calculation we did earlier, this equation takes into consideration additional costs such as profit margins. If you sold a product for $100 but had to pay $50 for it in the first place, then you didn’t make $100. This is the subtle difference between the two calculations. The first one simply looks at how much revenue your campaign brought in while the second one looks at how much profit you brought it. Whichever calculation you decide to use, make sure you always use the same one. The last thing you want to do is to mix the equations up, will ruin your results and give you bad data.
Now we’ve looked at the various ways to calculate the return on ad spend, how can you use this information?
The number one reason why the ROAS metric is so important is that it helps you evaluate the performance of an individual campaign. When you throw other campaigns into the mix, it can give you a good idea of which of your campaigns performs the best. If you’re running 10 different campaigns for your business, then it can be hard to decide which campaigns to increase your spend. However, the ROAS metric gives you the answer you need.
If all of your campaigns have a budget of $1,000 but one of them has a much higher ROAS metric, then you might want to adjust your spend. Why spend $1,000 to return $2,000 when you might have a campaign that will return $5,000 with the same spend? It makes sense to take that $1,000 and put it into your more profitable campaign. This is the beauty of the ROAS metric; it helps you work out which campaigns are the most profitable and if you should adjust your spending.
To improve your return on ad spend metric, you need to do one of two things: reduce your ad spend or increase your revenue. Unless you’re planning on switching supplier or increasing your prices, then reducing your ad spend is usually the easier of the two.
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