Return on Ad Spend (ROAS) is one way to help advertising and marketing professionals and investors analyze how well promotions do (or don’t) produce sales. It helps advertisers develop data based on their campaigns’ revenue production (or lack thereof). Understanding how this metric is calculated and how to analyze ROAS is essential for businesses to monitor and increase their advertising performance.
Known as a Key Performance Indicator (KPI), ROAS determines how much sales are generated per dollar invested on advertising outlays. It separates advertising costs from the company’s costs, and it focuses on:
1. The differences between advertising income and advertisement expenses
2. Assisting companies with creating efficient budgets
3. Identifying unprofitable campaigns
How ROAS is calculated:
Return on Ad Spend (ROAS) = Revenue generated from ad campaign/Total advertising costs for a specific campaign
The revenue generated from an ad campaign is the revenue immediately assignable to promotions utilizing a tracking tool.
Total advertising costs for a specific campaign are expenses explicitly connected to the advertising platform.
The resulting calculation determines the business’ return on ad spend, giving owners and managers an idea of how well (or not) ad spending impacts the company’s sales. It similarly enables business owners to reconcile the company’s budgeted advertising costs against growing sales metrics. The following hypothetical breakdown shows what a positive scenario looks like:
A ROAS of 10 = $10 of revenue was earned for every $1 spent on ads. This would translate into:
Total Ad Spend: $10,000
Revenue Generated: $100,000
ROAS = $10
ROAS = 10:1
Important considerations when calculating this include factoring in merchant expenses, costs for digital content production, and costs incurred from media platforms. It’s also important to consider that it’s not always cut-and-dry as to how and what specific ads convert potential customers into paying customers. Assigning the exact ad platform or campaign is a common problem when determining the exact ROAS.
Credit analysis conducted by lenders evaluates ROAS to determine the sales ability of companies seeking loans, especially with promotion-centric companies. The higher the ROAS, the less risk there is and the more reliable the revenue from each campaign. For merger and acquisition professionals, ROAS trends offer insight into a target company’s sustainability. It helps determine if a company’s advertising campaigns can sustain themselves and keep generating future growth.
It’s equally important to see how ROAS compares against other metrics. While ROAS focuses on revenue generated per dollar spent, the advertising-to-sales ratio looks at the total proportion of sales driven by advertising efforts. Similarly, while ROAS measures the revenue per ad spend, return on investment analyzes the comprehensive profitability for the complete level of marketing expenses – not exclusively advertising. While ROAS is a short-term measure on instant sales, Lifetime Value looks at the customer’s history with the company and the entire revenue the company earns from the relationship.
While this metric is helpful for many professionals, it’s important to ensure that only necessary data is included and customer conversion is monitored precisely in order to get the best output.
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