ROAS Calculator

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 advertisements. 

Over the years, ROAS gained widespread usage in marketing worldwide, and it's a 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 shown in dollars or as a ratio (i.e., in Google Ads). 

How to calculate ROAS?

The calculation of ROAS is straightforward. Just follow the steps below.

1. Gather all required information on Ad revenue and Ad spending.
2. Input those data to the form above or substitute the ROAS equation below.

ROAS formula

The ROAS formula is a simple ratio of the revenue from the ads to its cost.

ROAS = (Ad Revenue / Ad Spend) * 100%

Where:

• Ad Revenue - the total revenue from an 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 spending, extra commissions, shipping, storage, logistics, etc. It should guarantee you achieve net profit.

The exact value of ROAS depends on the gross margin you have on the products and the cost 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 a very high customer lifetime value, it could be sufficient if your ROAS is just above 100%. 

It is essential to understand that ROAS below 100% means definitive loss. Regardless of how efficient your business is and how high the margin you have, with ROAS below 100%, your ads cost much more than 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.

1. Write down all the costs required to fulfill the translation without considering marketing costs. The value should cover the costs of products sold (COGS), logistics, financing costs, workload, etc. The values should be presented as a percentage of the average transaction value.  
2. Sum those values to find your average operating costs per transaction. For example 60% COGS + 5% logistics + 6% workforce = 71%
3. Calculate the average profit per transaction before ad spend. In this case 100%-71% = 29%
4. 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 straightforward, this metric's actual value depends on various factors. To name just a few

• The brand
• Competition
• Marketing channel 
• 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. 

Remember 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 begin to tune up the campaigns. 

Common Pitfalls and How to Avoid Them

When calculating and interpreting Return on Ad Spend (ROAS), businesses often encounter several common pitfalls that can skew their understanding of advertising efficiency. Recognizing and avoiding these mistakes is crucial for accurate assessment and strategic decision-making.

1. Overestimating Ad Revenue:

Many businesses fall into the trap of overly optimistic projections of ad revenue. This optimism can lead to a distorted view of ROAS, making campaigns seem more successful than they are.

How to Avoid: Implement robust tracking and analytics to accurately measure the revenue generated from each ad campaign. Use historical data as a benchmark for realistic projections and regularly update your estimates based on actual performance.

2. Underestimating Ad Costs:

Failing to account for all expenses associated with an ad campaign can result in underestimating the total ad spend, artificially inflating ROAS.

How to Avoid: Ensure comprehensive tracking of all costs, including creative development, platform fees, and management expenses. Consider using a dedicated budgeting tool that integrates with your ad platforms to automatically track spending.

3. Ignoring the Full Customer Lifecycle:

A focus on immediate conversions can lead to neglecting the broader impact of ad spend on customer lifetime value (LTV). Ads that don't result in immediate sales but contribute to customer acquisition and retention can still be valuable.

How to Avoid: Expand your analysis to include LTV and customer acquisition costs (CAC) alongside ROAS. This broader perspective helps to evaluate the long-term value of ad campaigns beyond initial conversions.

4. Not Segmenting Campaign Data:

Treating all ad campaigns and channels as a monolith can mask variations in performance, leading to misguided strategy adjustments.

How to Avoid: Segment your data by campaign, channel, and target audience. This segmentation allows for more nuanced analysis and strategic decisions based on the specific performance of each segment.

5. Overlooking External Factors:

External factors such as market trends, seasonality, and competitive actions can significantly affect ad performance and ROAS.

How to Avoid: Regularly review external market conditions and adjust your advertising strategies accordingly. Stay agile and be prepared to pivot your approach in response to external changes.

6. Relying Solely on ROAS for Decision Making:

Using ROAS as the only metric for marketing decisions can overlook other crucial aspects of business performance and marketing effectiveness.

How to Avoid: Integrate ROAS with other key performance indicators (KPIs) like CAC, LTV, and conversion rates. A holistic view ensures that decisions are based on a comprehensive understanding of marketing performance.

By being aware of these pitfalls and implementing strategies to avoid them, businesses can ensure a more accurate, realistic, and effective use of ROAS in evaluating and optimizing their advertising efforts.

Integration with Key Marketing Metrics

Understanding how Return on Ad Spend (ROAS) interacts with other essential marketing metrics - Customer Acquisition Cost (CAC), Lifetime Value (LTV), and Conversion Rate—offers a comprehensive view of marketing performance.

Customer Acquisition Cost: CAC measures the cost of acquiring a new customer. A healthy balance is achieved when the revenue from a customer (reflected in ROAS) significantly exceeds the cost to acquire them (CAC). A high ROAS alongside a low CAC indicates efficient and profitable marketing campaigns.

Lifetime Value: LTV represents the total revenue expected from a customer over their relationship with the company. Analyzing ROAS with LTV assesses not just immediate returns but the long-term value of customers, guiding strategies for sustainable growth.

Conversion Rate: The conversion rate indicates the effectiveness of ads in driving desired actions. A high conversion rate boosts ROAS, showing that ad clicks are converting into revenue. Optimizing both metrics enhances ad campaign efficiency.

Holistic Marketing Performance Analysis: Integrating ROAS with CAC, LTV, and conversion rates allows businesses to evaluate and optimize their marketing strategies for both immediate efficiency and long-term customer value. This approach ensures marketing efforts are cost-effective, drive meaningful actions, and contribute to sustainable business growth.

Other useful tools

If you find this helpful tool, 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.

You may find our ROI calculator and EBIT calculator particularly useful.

If you wish to grow your business, you may look at our calculators for business owners, for example, the margin of safety of the discount calculator. A good discount policy may positively impact the ROAS.

Authors

Created by Lucas Krysiak on 2022-07-14 16:50:01 | Last review by Mike Kozminsky on 2024-02-14 11:12:13