What is ROAS?
Return on ad spend (ROAS) is arguably the single most important metric in understanding the effectiveness of paid advertising campaigns. It simply measures how many dollars you generated in actual revenue for each dollar spent on advertising.
How Is ROAS Calculated?
ROAS is calculated by dividing the total revenue generated from a campaign by the cost of running that campaign.
ROAS = Profit from advertising/Cost of advertising
Here is an example:
So why does ROAS matter for eCommerce brands? Let’s say you spend $2,000 on an advertising campaign promoting your products. With conversion tracking set up, you are able to trace those advertising dollars to $6,000 of revenue directly from those campaigns.
In this scenario, your ROAS would be 3 (also expressed as 3x or 300%). You made $3 in revenue for every $1 of advertising spent.
Using ROAS To Optimize Ad Spend
ROAS is not just an extremely important metric for eCommerce companies to benchmark. With campaign optimization, an eCommerce store has the ability to track and improve ROAS over time. With advanced reporting, you can see ROAS broken down by:
- Audience segment
- Ad creative
- Ad copy
Utilizing the breakdowns above, here are some scenarios on how you could optimize a campaign.
You run the same ad on two different platforms (say, Facebook and Instagram) over a two week period. Despite the fact that the copy, images and budget are identical, a week later you notice the Instagram campaign resulted in twice as much revenue. You didn’t expect this but, because you are tracking ROAS, you are able to adjust your strategy by reallocating your advertising spend almost entirely to Instagram, maximizing return.
The takeaway from this example is that you can use ROAS to measure and compare the effectiveness of your advertising on different platforms. Furthermore, because of the ability to measure the performance of ads on a given platform, ROAS can act as a warning sign if something is wrong. A significantly lower than normal ROAS on a specific platform might be indicative of a problem with some element(s) of your campaign.
You have come up with several different ads to spur excitement for a new product. You want to launch a major campaign across multiple platforms, but you don’t know which of your ads is going to be the most effective. So, before spending a lot of money, you want to know which ad should have the largest budget.
To do this, you simultaneously launch three one week campaigns on Google Ads, each of which uses a different variation of the ad copy you are considering for your big campaign. At the end of the week, you compare the ROAS of the three ads and find one with a 3x ROAS, one with a 2x ROAS, and one with a 5x ROAS.
With this information, you are able to confidently choose the ad which generated the 500% ROAS for your campaign sprint.
You have been running a Facebook campaign promoting a specific product for a few weeks now. ROAS for the overall campaign is at 3x. You decide to look at the return broken down by age group and learn that you are getting a 0.82x (negative return) on 18-24 year olds and a 6.32x on 25-34 year olds.
With this information, you can adjust the campaigns targeting parameters to exclude 18-24 year olds so that your budget is optimized towards the age group that is generating the best return for you.
Why ROAS Matters for eCommerce
The utility of ROAS is not limited to the examples provided here. As a metric, ROAS is the closest answer to the question: how effective is my advertising campaign?
Interested in learning more about ROAS and how your business can leverage the power of data? Untitled would love to chat.