What is it?
Return on Ad Spend (ROAS) is an important key performance indicator (KPI) used to measure the effectiveness of a company's advertising campaigns. It calculates the revenue generated for every pound spent on advertising. Essentially, ROAS helps businesses determine whether their advertising efforts are profitable or if they need to adjust their strategies.
Why is it Important?
ROAS is critical for evaluating the success of advertising campaigns and understanding the direct impact of ad spend on business revenue. By calculating ROAS, businesses can determine which marketing channels and campaigns are the most cost-effective, and which ones need optimisation.
A high ROAS indicates that advertising efforts are generating a strong return on investment, while a low ROAS might signal the need for adjustments such as refining the target audience, changing ad creatives or reallocating budgets across different platforms. ROAS also helps businesses make data-driven decisions about future marketing investments, ensuring that ad spend is allocated in the most profitable way.
In eCommerce and digital marketing, businesses typically set target ROAS goals based on their margin requirements, so they can maintain profitability while scaling their advertising efforts.
How to Calculate it
The formula for calculating ROAS is straightforward:
𝑅𝑂𝐴𝑆 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑓𝑟𝑜𝑚 𝐴𝑑𝑠𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑑𝑠ROAS = Revenue from AdsCost of Ads
For example, if a business spends £2,000 on a Facebook ad campaign and generates £10,000 in revenue as a result, the ROAS would be:
𝑅𝑂𝐴𝑆 =10,0002,000= 5ROAS =10,0002,000= 5
This means that for every pound spent on advertising, the company made £5 in revenue.
It’s important to note that while a high ROAS is desirable, the ideal ROAS will vary by industry, business model, and profit margins. For example, a business with low margins may need a higher ROAS to cover costs and remain profitable, whereas a company with higher margins may find a lower ROAS acceptable.
A good understanding of ROAS is key for all companies interested in marketing and is a good point of reference when discussing more complex issues such as how the revenue from marketing is calculated (Attribution) and including other marketing costs to generate MER (Marketing Efficiency Ratio).
How the Data Refinery Can Help
The Data Refinery connects to most eCommerce and Marketing platforms and connects you data from across the business. By linking data across, we can give you a truer version of ROAS and other marketing KPIs that link to your P&L, so you can trust in your reporting.
