And while most marketing professionals understand how to calculate and track essential metrics, defining ROAS or explaining the difference between ROAS and ROI seems difficult for many.<\/p>\n\n\n\n
So let\u2019s fix that.<\/p>\n\n\n\n
We\u2019ll take a deeper look at what ROAS is, the formula to calculate it, and how smart use of optimization can improve your bottom line (aka, increase your amount of revenue) without having to increase your marketing budget<\/em><\/strong>.\u00a0<\/p>\n\n\n\n Here\u2019s what you\u2019ll find in this article: <\/p>\n\n\n\n ROAS is a way to measure the spend efficiency of your advertising campaigns \u2014 a ratio of how much revenue you generate per every dollar spent on advertising.<\/p>\n\n\n\n Other metrics (such as click-through rate or conversion rate) are meaningful in their own right, but they don\u2019t address whether or not your money is being spent as wisely as possible. ROAS provides a zoomed-out look at whether or not a specific campaign is paying off, financially speaking.<\/p>\n\n\n\n Not quite sure how this plays out? Let\u2019s pretend you\u2019re using an ATM: <\/p>\n\n\n\n Scenario #1:<\/strong> You put one dollar in and get $5 back. That\u2019s positive ROAS.<\/p>\n\n\n\n Scenario #2:<\/strong> You put one dollar in and get .50 cents back. That\u2019s negative ROAS.<\/p>\n\n\n\n If you experienced scenario #1, you’d put as many dollars as possible into that machine, right? If you had scenario #2, you wouldn’t put any more money into that machine.<\/p>\n\n\n\n An ad campaign is similar to an ATM machine with different outcomes. You want to find the ones that turn one dollar into more dollars, not the ones that turn dollars into cents.<\/p>\n\n\n\n A reminder:<\/em> ROAS is similar to ROI, but they\u2019re not the same. <\/p>\n\n\n\n Image source<\/em><\/a><\/p>\n\n\n\n Now that ROAS as a metric makes a bit more sense, here\u2019s how you calculate it. ROAS is the ratio of the revenue generated from an ad campaign compared to the cost of the campaign.<\/p>\n\n\n\n ROAS calculation looks like this:<\/p>\n\n\n\n Here\u2019s an example:<\/strong> Let\u2019s say you allocate $5,000 of yourmarketing budget to a pay-per-click (PPC) campaign. By tracking the clicks that the campaign generated and following them through to check-out, you\u2019re able to determine that those clicks generated $15,000 in sales. <\/p>\n\n\n\n To calculate your ROAS you\u2019d divide $15,000 by $5,000<\/strong>, so <\/strong>every dollar of ad spend resulted in $3.00<\/strong> worth of sales. (In your ad management platform, this would display as a 3x ROAS.)<\/p>\n\n\n\n And referring back to our ATM example, that means for every dollar you put in you\u2019d get $3 back. <\/p>\n\n\n\n Makes sense, right?<\/p>\n\n\n\n Here\u2019s where some of the confusion comes in. Some marketers say, \u201cHey, the net revenue is really $10,000. You have to subtract the advertising costs from sales resulting from the ads to get the true figure.\u201d<\/p>\n\n\n\n And that\u2019s true\u2026 if you\u2019re calculating return on investment.<\/p>\n\n\n\n Here\u2019s how to calculate ROI:<\/p>\n\n\n\n And here\u2019s how that looks, using our example: (15,000 \u2013 5,000) x 100 \/ 5,000 = 20% ROI<\/strong><\/p>\n\n\n\n See the difference? <\/p>\n\n\n\n Return on Investment is one measure of the profitability of your business. It is a ratio of net revenue to the expense required to obtain that revenue. Both metrics, ROAS and ROI, are important to track and monitor. It is essential, though, that there is agreement on how each metric is derived, and that they are always calculated in the same way. Otherwise, you can be deceived by movements in the results. <\/p>\n\n\n\n ROAS tells you how much money you\u2019re getting in return for every dollar you spend on advertising. It\u2019s an essential metric for evaluating how well your advertising campaigns performed and how they contribute to your store\u2019s bottom line. <\/p>\n\n\n\n To help keep costs in check, marketing professionals often use a target ROAS when planning campaigns. To estimate how much revenue you expect to get back from an ad spend, reverse engineer the formula. (Advertisers, for example, often do this to develop a target ROAS<\/a> for their Google AdWords campaigns.) <\/p>\n\n\n\n Marketing and advertising campaigns play a big role in brand awareness, sale promotions, and introducing new products. In short, these campaigns often lead to sales, and knowing how efficient your campaigns are is imperative if you want to increase sales. <\/p>\n\n\n\n Calculating ROAS and using that data helps ecommerce companies increase clicks \u2014 driving traffic and hopefully boosting sales. <\/p>\n\n\n\n And on the flip side, if you\u2019re actively monitoring ROAS you\u2019re able to turn off unprofitable campaigns quickly \u2014 so you aren\u2019t throwing away money promoting ads that aren’t converting well.<\/p>\n\n\n\n Your target ROAS should be the average conversion value that you\u2019re expecting to receive for every dollar you spend on an advertisement. The target will vary according to the company and the product being sold, but three to five times return on ad spend ratio are good numbers to aim for<\/strong>.<\/p>\n\n\n\n What are ecommerce companies seeing in terms of ad performance? Let\u2019s take a look at how Google, Facebook, Instagram, and Amazon ecommerce ads performed in 2020<\/a>, according to one report:<\/p>\n\n\n\n Google shopping: ROAS improved 3%<\/a> year over year.<\/p>\n\n\n\n\n
What is ROAS?<\/h2>\n\n\n\n
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<\/figure>\n\n\n\nHow to calculate ROAS for your ecommerce business<\/h2>\n\n\n\n
![\"return](\"https:\/\/thegood.com\/wp-content\/uploads\/ROAS-Formula-1-e1635177938637-1024x471.png\")
<\/figure>\n\n\n\nHow is ROAS different from ROI?<\/h2>\n\n\n\n
![\"Return](\"https:\/\/thegood.com\/wp-content\/uploads\/roas-2.png\")
<\/figure>\n\n\n\nWhy is calculating ROAS important in ecommerce?<\/h2>\n\n\n\n
What’s a low ROAS and a high ROAS for an ecommerce company?<\/h2>\n\n\n\n
![\"google](\"https:\/\/thegood.com\/wp-content\/uploads\/image2-37-1024x266.png\")
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