Your products and services might be the best, but if no one knows about them, it’s unlikely you’ll see a lot of customer conversions. That’s where advertising comes in. Advertising creates customers, but it’s only effective when it’s aimed at the right audience. Otherwise, it’s a wasted investment. Finding these connections between ads and customers may seem daunting, but there’s one metric that cuts through the static: ROAS (Return on Ad Spend). It’s the money your ads bring in compared to what they cost to be published.
ROAS helps you evaluate your ads’ performance. It draws a spotlight to your most valuable and effective campaigns, so when you allocate your marketing budget, you can be certain you’re backing a winner. What’s more, with modern technology, you don’t have to sit around twiddling your thumbs, waiting for the final results. Today, data is delivered to you in real time, so you know right away whether to hit the gas or pump the brakes. But before we explain what is a good ROAS, let’s take a look at how it’s formulated.
How to Calculate ROAS
Determining your ROAS is simple. Divide the revenue the ad brought in by the money you spent creating it. Put simply:
ROAS = Ad Revenue/Ad Cost
For example, if you spent $10,000 on a digital ad campaign and it generated $50,000 in sales, then your ROAS was 5:1 ($50,000 ÷ $10,000). However, while the formula is simple, arriving at each number is a bit more complicated. Depending on your situation, costs may include:
- Budget. The money you spent to run the ad. In the digital space, this may include placement and bidding costs ‒ the amount you paid for your ad to appear in relevant search results.
- Tools and Software. The computer programs used to create the ad (e.g. Photoshop, Canva) and the services required to launch it, which often require a subscription fee.
- Partner and Vendor Costs. Paid to the agencies, freelancers, or consultants that helped you create or manage your digital advertising campaign.
- Affiliate Fees. Commission paid to marketers who refer customers to your business. Digital marketers normally use an affiliate code or customized link in order to flag sales they’re responsible for.
In addition, because an ad campaign can have many different objectives, calculating revenue isn’t always straightforward. While most ads are designed to sell products, others are designed to gather leads or increase awareness. In these cases, revenue generated from the ad might not appear for several weeks or months. Investing in CRM software or partnering with a marketing firm will help you track clicks, impressions, and sales, in order to illuminate your ad’s overall impact.
What is a Good ROAS?
While every company wants their ROAS as high as possible, most aim for returns of 3:1 or 4:1. In other words, for every dollar they spend, they expect three to four dollars back. However, it all comes down to your circumstances. What’s your profit margin? What’s your marketing budget? What’s your industry? What’s the size of your company?
Businesses with high margins can experience healthy growth with a low ROAS. That is to say they can absorb high advertising costs. Conversely, companies with low margins generally need to see much higher returns. In fact, cash-strapped startups often require an ROAS of up to 10:1 in order to survive.
Maximize ROAS with YPM
It’s possible to get by with a low ROAS, just as it’s possible to drive around a racetrack in low gear. But why settle for last when you can rocket into first? No matter which industry you work in, YPM has the tools to supercharge your marketing engine. Our consumer research focuses your ads on the most receptive audience, with keywords targeted to their interests and landing pages designed to convert. Contact us today and kick your returns into high gear.