ROAS (Return on Advertisement Spending) is a calculated metric used to measure the overall effectiveness of advertising expnditure. ROAS can be easily calculated by dividing the gross revenue generated from an advertising campaign by the aggregate of expenses incurred to run and manage the campaigns.
ROAS = Revenue / Cost
Effectively measuring ROAS is helpful to understand the usefulness of a particular advertising campaign and to understand it’s associated dollar value. An ROAS ratio of more than 3:1 signifies that your campaign is generating revenue that is 3 times your overall spend, while anything below 1:1 means this is going to be more of an expenditure than return because of overall costs of order fulfilment. Please note that ROAS<1 doesn’t always mean that your campaigns are performing poorly as can be understood with below reasoning:
- CLV/CLTV(Customer Life Time Value): It is defined as the net profit attributed to a particular customer by carefully predicting it over their lifetime (or the period of association). It is recommended that in case of new leads/customers, you use CLV as the revenue generated from a campaign to calculate the ROAS and not just lead’s first spend on the site. However, for returning customers you may choose to just take their spend in the current/attributed session.
- Multi-Channel Conversion: In today’s time, it rarely happens that you get leads/customers on your first ad impression to them, rather, it spans through multiple ad-campaigns on multiple devices and over a time span, all collectively known as multiple conversion touch-points. As mentioned, it is quite challenging to attribute the whole success of getting a lead/conversion to a single campaign and hence it is difficult to correctly estimate revenue generated and ROAS. So, do not forget to factor this in your calculations.
- Don’t use one yardstick to measure everything: Yes, that’s right! Depending upon the type of campaign e.g. informative or brand building, measuring lead count or associated revenue may not be the best measure of success. Instead of reporting low on a not-so-relevant metric a better measurement scale should be chosen.
Target ROAS is a commonly used term across advertisement platforms with smart bidding feature. This is a mode where algorithms work in the background to optimize your spending for maximum returns. If you are using Google Ads, you should have a minimum of 50 conversions in the last 30 days for it to work.
Note that ROAS is an advertiser-centric metric whereas ROI is a business-centric metric. In other words, ROAS focusses only on how one of your ad campaigns is performing and how much revenue are you making for per dollar ad spend, whereas, ROI takes business running costs into account to calculate overall profit from any campaign.
ROI = ((Revenue – Costs)/Costs)*100
Both the metrics are equally important to evaluate the success of a campaign and to measure its overall business impact.