What is Return on Ad Spend (ROAS)?
Return on Ad Spend is a metric of paid ads performance. ROAS tells you how much revenue you get from each dollar spent on advertisement.
Over the years ROAS gained widespread usage in marketing across the world and it’s de facto standard for all marketing platforms. So understanding this metric is mandatory for everyone who thinks about growing his business.
ROAS may be presented in different forms. Usually it is expressed as a percentage value, but sometimes it is presented in dollars or as a ratio (i.e. in Google Ads).
How to calculate ROAS?
Calculation of ROAS is very simple, just follow the steps below.
Gather all required information Ad revenue and Ad spend.
Input those data to the form above or substitute to the ROAS equation below.
The ROAS formula is a simple ratio of the revenue from the ads to its cost.
ROAS = (Ad Revenue / Ad Spend) * 100%
Ad Revenue - the total revenue from ad campaign
Ad Spend - the total cost of this particular campaign
What is a good ROAS?
Good ROAS is a value that provides revenue high enough, so gross margin can cover all the costs related to the transaction.
So the margin generated by ad campaigns should cover ad spend, extra commissions, shipping, storage, logistics etc. Basically it should guarantee you achieve net profit.
The exact value of ROAS depends on the gross margin you have on the products and the costs structure of the company.
Most ecommerce businesses consider ROAS in the range of 500% to 1000% a good result.
Of course there are types of businesses that could accept lower ROAS. For example if you sell virtual products and your gross margin is close to 100% or you have very high customer lifetime value, it could be sufficient if your ROAS is just above 100%.
It is important to understand that ROAS below 100% means definitive loss. Regardless how efficient your business is and how high the margin you have, with ROAS below 100% your ads cost much more that they make.
How to calculate break even ROAS?
Break Even ROAS is a ratio of ad revenue to ad spend where generated margin covers all the costs related to the transaction.
In order to find this value you should.
Write down all the costs required to fulfill the translation without considering marketing costs. The value should cover costs of products sold (COGS), logistics, financing costs, workload etc. The values should be presented as a percentage of the average transaction value.
Sum those values to find your average operating costs per transaction. For example 60% COGS + 5% logistics + 6% workforce = 71%
Calculate the average profit per transaction before ad spend. In this case 100%-71% = 29%
Now your break even ROAS could be calculated using this formula:
ROAS < 1 / avg_tx_profit * 100%
In our case ROAS could not exceed: 1 / 29% * 100% = 345%
How to improve ROAS?
Although the ROAS formula is very simple the actual value of this metric depends on a variety of factors. To name just a few
Quality of product description and images
The price of the product
Technical optimization of the ad campaign
In order to improve ROAS you should address each of those factors and optimize them one by one.
Keep in mind that some marketing platforms with advanced machine learning (Google Ads, Facebook) need some time to optimize your ad efficiency. So if you are just starting, wait a few weeks and gather some data before you start to tune up the campaigns.
Other useful tools
If you find this tool useful, you may also like other calculators available on Calcopolis. If you plan to optimize your business using profitability metrics visit the category with calculators for investors.