Return on Ad Spend

What is Return on Ad Spend?

Return on Ad Spend (ROAS) measures the revenue generated for every monetary unit (euro, dollar, etc.) spent. ROAS serves as a “base level” metric that measures across all advertising channels, and can later be segmented by channel for further analysis.

In contrast to pay-per-click (PPC) – also used by marketing teams – the higher the ROAS, the better your ads translate into revenue. This is a key KPI for marketing departments, since they are in charge of choosing the most suitable channels and creating content for them.

To obtain the ROAS, Plecto obtains the relevant data from Facebook, Linkedin and Google Ads, some of the most-used platforms for paid advertising. The ROAS KPI will then show the exact amount you’re getting back from your advertising investment on these platforms.

ROAS is a particularly relevant metric for your marketing team to track.

Why is Return on Ad Spend important?

ROAS is important because it shows how much ad revenue is impacting your bottom line. In this sense, it differs from ROI (return on investment), a far broader measure that encompasses a company’s overall profits and expenses.

In conjunction with other metrics such as Total Ad Spend and Number of Ad Conversions, ROAS helps marketers determine the effectiveness of their advertising campaigns. Campaigns that generate too little in revenue compared to their costs can be abandoned, whereas campaigns that generate a significant amount of revenue relative to their initial costs can be continued, expanded, and improved upon.

How to calculate Return on Ad Spend

To calculate ROAS, divide the revenue you’ve earned from advertising by the cost of advertising. You can include salary, vendor, and affiliate costs in your ROAS calculation.

How to optimize your Return on Ad Spend

The best practice for using ROAS is to determine an acceptable ratio of revenue from ads to ad cost. There’s no hard-and-fast rule about this, but a 4:1 ratio is often considered acceptable. Under this guideline, for example, an ad campaign that generates €4000 in revenue should cost no more than €1000.

It’s also helpful to break down your ROAS into specific components, whether performing the calculation or evaluating particular campaigns and ads. For example, you can vary your ROAS results by factoring in salary, vendor, or affiliate costs, depending on your needs. You can evaluate the ROAS of a single ad, or the ROAS of a prolonged marketing campaign. In short, ROAS is a highly flexible metric that can be fine-tuned to evaluate specific components of your marketing budget and strategy.

Similar KPIs to ROAS include:

• Number of Ad Conversions
• Spend per Ad Impression
• Ad Spend per New Deal