ROAS Calculation: How to Know If Your Ad Spend is Working

Diversifying Ad Spend

7 MIN READ
ROAS Calculation: How to Know If Your Ad Spend is Working

Whether you're increasing or decreasing your ad budget, knowing what kind of returns your campaign generates is critical to brand growth. More importantly, calculating your return on ad spend helps you refine your marketing mix, compare various initiatives, and discover which marketing mediums are the most successful.

What is Return on Ad Spend (ROAS)?

Return on Ad Spend (or ROAS) is a performance metric showing you what you achieved from your ad campaign.

Said another way, you invested X dollars into an ad campaign. Once the campaign was over, you ended up with X number of sales, impressions, conversions, prospects, etc. While it's critical that you calculate your ROAS correctly (which we will discuss), there's several different ways to go about it.

 

All your ROAS tells you is what you got from your ad spend. Nothing more. Nothing less. As we go through the most popular ways to calculate your ROAS, just know that the approach you choose must make sense to you, your team, and the people you report to.

Is ROAS the Same As ROI?

Return on ad spend is different from return on investment. ROAS only tells you what happened, while ROI shows you whether you made money from your ad campaign.

roas versus roi courtesy of ignite visibilitySource: Ignite Visibility

For example, a ROAS of .57 is a negative ROI. It means that for every dollar you spent, you only got 57 cents back. You invested more than you got back.

It's impossible to have a negative ROAS. The lowest possible return on ad spend you can achieve is 0 (or $0). ROI, on the other hand, is either positive or negative. That's because your ROI is your sales minus what you spent on ads.

Total sales from ads - ad spend = ROI

As you look at the different ways to calculate your ROAS, you'll want to pay attention to which numbers show that you broken even and which numbers mean you came out on top.

Why Does ROAS Matter?

Return on ad spend is critical to helping you determine whether your ad spend budget is actually working. ROAS can tell you whether or not you achieved a positive ROI, which ad campaigns/sets were most successful, and informs you on how your ads are being received by the audiences you target.

Lastly, ROAS helps you measure the effectiveness of your ads against other marketing initiatives currently underway, such as word-of-mouth marketing campaigns or community influencer partnerships.

How Do You Calculate ROAS for Your Ad Campaign?

There are several acceptable ways to express return on ad spend. Whichever one you choose should make sense to your team and (most of all) the people you report to.

For example, if you login to your PPC account on Google or Facebook after you've launched a campaign, you'll see something like this:

example of roas google ads courtesy of adtribeImage courtesy of Adtribe.com

In the example above, the ads manager is expressing ROAS by a whole number, and we'll explain that in a moment. For now, just know that the most common ways to show ROAS are:

  1. ROAS as a percentage (%)
  2. ROAS as a ratio (#:#)
  3. ROAS in currency ($)
  4. ROAS as a whole number (#)

Remember that the ad platform you're using may not be accurately reflecting results. For example, in a cost-per-action (CPA) campaign the ad platform may count a landing page visit as a conversion regardless of whether the user submitted their information. This problem often has to do with if you installed a pixel and if it lives on the correct page. 

All to say, make sure to use your own conversion metrics (verifiable sales, new leads, etc.) when calculating ROAS.

Remember also that you can find ROAS for a specific ad set, ad campaign, or entire ad spend for a given month, quarter, or year.

1. By Percentage

Percentage is a fairly common way to demonstrate your return on ad spend. To do this, use the formula below:

({Sales or Conversions} / Ad spend) x 100% = % ROAS

A good ROAS in this case is anything above 100%. A 100% ROAS means you broke even, so the higher your percentage, the better your ad performance.

2. By Ratio

Many marketers like to show ROAS in a ratio format, such as 5:1 or 2:1. To do this, use the formula below:

({Sales or Conversions] / Ad spend) : 1

A good ROAS by ratio is anything greater than 1:1. A 1:1 ROAS means that you broke even. 

You can also express a ROAS ratio as "5 to 1" or "3.2 to 1." Whatever format you use, make sure that it's clear to your team what the number means and how it compares to your goals and KPIs.

3. In Dollars (Currency)

By far the simplest way to calculate your return on ad spend is by currency, USD in this case. All you need to do is divide your sales by your ad spend like this:

Sales / Ad spend = $ ROAS

$1 means you broke even, so any number above $1 represents a positive ROI. By contrast, anything less than $1 says you lost money in your ad campaign.

4. By Whole Number

Most PPC platforms demonstrate return on ad spend as a whole number. Here's how they typically calculate it:

Conversions / Adspend = # ROAS

A ROAS of "1" is breaking even. You want a ROAS of 1.1 or above (ideally higher) to achieve a positive ROI. Again, make sure to use your own conversion metrics because the ad platform's conversion numbers may not be entirely accurate.

How Do You Determine Whether Your Ad Campaign Was Successful?

How you calculated your ROAS (see above) will show you whether you achieve positive returns. Furthermore, your ad goals and KPIs help you determine whether your ad campaign was a success.

What is a Good ROAS?

In general, a good marketing campaign achieves at least a 2 to 1 return on investment. If your ad campaign isn't doubling your investment (in most cases), it means you should either make serious effort to improve the campaign or abandon the tactic altogether in favor of campaigns that achieve better results.

Often, your first couple ad campaigns help you gather intel on how to achieve best results. So if your initial campaigns produce a low ROAS, you needn't be too discouraged. It just means you need to improve your content, dial in your audience targeting, or select a different ad platform.

That said, think carefully about your ad spend goals. Establish clear objectives and set achievable KPIs to help you determine whether your campaign is achieving those goals. Your objectives and KPIs should include a ROAS target that makes sense for your industry, product, budget, and audience.

Reasons Why Your Ad Spend is Not Working

1. Consumers are increasingly more ad avoidant.

Ad avoidance is any action a user takes to block, skip, or ignore ads in their browser or feed. - How Many People Use Ad Blockers?

 

This is a critical point. Consumers are predominantly either antagonistic or apathetic towards ads.

"Most consumers now proactively avoid advertising, whether by using ad blockers, paying for ad-free digital media experiences, or skipping ads." - eMarketer

 

Among the most common reasons why people are ad avoidant include:

  • Ads generally interrupt user experiences.
  • A high percentage of ads or irrelevant.
  • Many ads look suspicious or pose a security risk.

Solving the "ad avoidance" problem means diversifying your ad spend in favor of more organic marketing tactics. We'll show you several ways to do this in the next section.

2. You are boosting poor-quality content.

With the understanding that ad avoidance is at an all-time high, the message and content approach you choose is crucial. If the video, image, or message resonates quickly with your audience, your chances of success are much higher.

After a campaign with low ROAS, consider changing up your content and testing different styles to find out what your audience likes best.

3. You are targeting the wrong audience.

Going after the wrong people online is probably the most common reason why ads don't work. Leading platforms like Google Ads and Facebook Ads Manager are offering more targeting options, as well as web page pixels to help you identify those people most likely to appreciate your ad. Taking time to understand your targeting options can make all the difference for your campaign.

4. Your brand's bad reputation precedes your ad.

There's very little you can do if your audience believes terrible things about your brand. Before running ads, consider taking careful steps to improve your produce/service, customer service, and reputation. 

After creating a strategy to improve your reputation, you can incorporate ads to promote the message that you've made significant changes to help customers. The important thing here is that your leadership focuses on solving problems rather than getting defensive or throwing more ad spend behind low-performing campaigns.

5. You are too dependent on ads.

If you've not diversified your ad spend (particularly in the current ad avoidant consumer climate), then you're likely doing everything right and still seeing diminishing returns.

To solve this problem, you'll need to invest in your content marketing strategy, brand community, and organic growth. Take a sizable portion of your ads budget and invest in Community Commerce tactics that both drive more conversions and improve your ROAS over time.

6. Your ad spend isn't high enough.

ad spend year over year emarketerSource: eMarketer

Paid ads are expensive. Even when you achieve positive ROI, you most likely spent thousands of dollars to get there. If your marketing budget is low to begin with, check out the next section, "Alternatives to Traditional Ad Spend."

But if ads are a critical part of your marketing strategy, then you're going to have to devote sizable dollars for several months to test, tweak, and optimize your ad for best results. Both take time and money, and if you're trying to "nickel and dime" your ad set, you're going to get meager results.

Alternatives to Traditional Ad Spend

Thankfully, you don't have to throw the majority of your marketing budget at paid ads. There are several low-cost, high-reward alternatives.

1. Search Engine Optimization (SEO)

SEO improves your web page rankings on Google and other search engines. The best way to launch an SEO strategy is to work with an SEO expert and quality copywriter to produce relevant content on your website.

search engine optimization according to mozSource: Moz.com

Make sure that you're targeting the right keywords on each of your web pages, and then consider building a blog to accompany your main site. If you're an eCommerce brand, SEO writing is critical for your product description pages.

2. User Generated Content (UGC)

UGC is any third party mention of your brand online. These include social media mentions, branded hashtag users, or great customer reviews.

You can boost UGC through consistent social posting, social media contests, community influencer collaborations, and more. Consumers trust consumers, and any UGC you can gather will only strengthen your organic growth.

3. Community Influencer Marketing

Community influencers are brand community leaders who've nurtured trust and connection with members of your target audience. Partnering with these creators is one of the most lucrative ways to drive brand awareness and sales for your brand.

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4. Brand Community Marketing

Brand community marketing can include community influencers, but it will also mobilize your eager, non-influencer fan base. 

Your brand has value beyond its products and services. Most of your repeat customers are people who love your brand for its voice, values, and unique customer experience. These people can be advocates for your brand if you incentivize referrals, engagement, and more.

The first step is to identify your top customers and fans. Next, you will want to create a virtual space for them to connect with your brand and one another. By focusing on what you can offer brand community members, you'll earn the right to partner with brand community members to drive brand awareness and conversions online.

5. Word-of-Mouth Marketing (WOMM)

WOMM includes UGC growth, community influencer marketing, and brand community marketing. Each of these tactics focus on what others say about you rather than your brand beating its own chest.

Brands that take their word-of-mouth seriously always outperform their competitors. Buyers trust each other and frequently go out of their way to get recommendations from friends and family.

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Paid Amplification - The New, Smarter Way to Achieve High ROAS

Paid amplification is a type of ad spend that prioritizes organic growth and word-of-mouth over ad campaigns. In fact, this approach only boosts content through ads that has already proven itself profitable in an organic setting.

Paid amplification tactics like influencer whitelisting, sponsored consumer posts, and more look native to social media feeds and also feel more authentic. Once you've developed a strong Community Commerce strategy, paid amplification can drastically improve your ROAS and ad spend ROI.

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