What is ROAS?
ROAS, or “Return on Ad Spend,” is more than just an acronym; it’s the lifeblood of any performance-driven advertisement strategy. It measures the efficiency of a specific ad campaign by determining how much revenue you make for every dollar you spend. Pretty neat, right?
Why is ROAS so essential?
- It highlights which ads are yielding profits.
- It aids in precise budget allocation, ensuring you get more bang for your buck.
- It offers rich insights, revealing campaigns that might need a touch-up or a complete overhaul.
Why ROAS Matters
Imagine you’re at an auction, bidding on items without knowing their value. Sounds risky, right? Operating ads without understanding their ROAS is similar. If you don’t have Conversion and ROAS metrics in place on you marketing platforms- you’re bidding on clicks. That might sound fine but remember- only up to 2% of all visits end up in a purchase. It also allows you to
- Budget Efficiency: It ensures that every dollar is well-spent, maximizing potential returns. Running GoogleAds with 10x ROAS, while Facebook only manages to provide 4x ROAS. You should invest more in GAds.
- Campaign Effectiveness: By identifying high-performing ads, ROAS tells us what resonates with our audience and shows the gaps in our strategy if ROAS is low.
- Strategic Decision Making: By understanding the profitability of different campaigns, businesses can make informed decisions about where to invest resources.
How to Calculate ROAS
The formula is refreshingly straightforward:
- Revenue from Ad Campaign: Total earnings from the ad campaign.
- Cost of Ad Campaign: Total amount invested in the campaign.
What’s a Good ROAS?
This is a question that each and every business have to answer themselves. Before deciding your ROAS target you must answer a couple of questions:
- How much profit do I make from each sale after deducting all costs?
- What are my primary goals? Am I focusing on growth, profitability, or brand awareness?
- Are there times of the year where I expect a higher or lower ROAS due to seasonal sales patterns?
- Do I have a diverse range of products with different margins, and how does this affect my overall target?
Let’s have an example:
Business: Bella’s Boutique is a one-year-old online store selling handcrafted jewelry. Bella, the owner, sources materials, designs, and makes the jewelry herself. Her primary selling platforms are her website, Instagram, and Facebook. She’s considering running ads to boost her sales and wants to determine a target ROAS.
- Cost to make one piece of jewelry (materials, tools, time): 20 eur. She sells it for 60 eur on her website. Profit per sale: 40 eur (or a profit margin of 66%)
- Bella is primarily aiming for growth to establish a loyal customer base.
- Bella notices spikes in sales around holidays and plans to run special promotions during those periods.
- While Bella has different pieces of jewelry, her margins across products are relatively consistent.
So with such high profit margin (66%) she needs x1.5 ROAS to break even meaning every euro she spents need to get 1.5 eur in sales. Anything that goes above x1.5 is her profit.