ROAS

What is the ROAS
ROAS or return on advertising investment is an advertising performance metric used in digital marketing to measure the effectiveness of an ad campaign on Google Ads, Facebook Ads, LinkedIn Ads or all paid acquisition channels used by your business. This ratio measures the number of gross euros we get back per euro invested. Therefore, Return Over Ads Spending helps online businesses identify which channels, campaigns or ads are working and optimize their advertising efforts.

Why it is important

ROAS is essential to quantitatively evaluate the performance of advertising campaigns. It allows us to know which advertising acquisition channels contribute the most to the results of the business or online store. And therefore allow you to decide where to place your advertising budget to be efficient. A very simple example: Suppose we have the following ROAS:
  • Googlea Ads:8
  • Facebook Ads: 4
Each euro of advertising invested in Google gives us twice as much revenue as in Facebook. You will agree with me that in this case, it is preferable to invest in Google ads versus Facebook. There is no discussion possible. Without ROAS, we simply cannot track campaigns. And detect which ones work and which ones don’t. Therefore, the function of this simple metric is to allow us to make decisions to adjust our campaigns and know where to make changes without having to wait to make profitability calculations.

ROAS Formula or How to Calculate ROAS Quickly

The calculation of this metric is very simple. The first thing you need to do is to be clear about the ad spend on the total number of channels you are using. Right after that, you should check the turnover generated by all the products sold thanks to the advertisements …and then it is a matter of applying the following formula:
ROAS FORMULA
Advertising Revenues ÷ Advertising Expenses = ROAS Or use an ROAS calculator such as this one:

https://www.classyllama.com/roas

This is how easy it is to calculate ROAS.

How do I know if my ROAS is good or bad?

In reality, ROAS is a ratio that does not measure profitability.

Therefore, this metric is somewhat misleading since it does not discount costs and we can easily be selling at a loss.

So how can you know if your ROAS is good or bad?

An acceptable ROAS for your business will be conditioned by your profit margins.

Some companies need an ROAS of 11:1 to be profitable and others with only 3:1 can keep their margins intact.

The bottom line in this regard is that the overall advertising and marketing campaigns must be profitable.

So, there is no right answer to this question. It all depends on the margins.

Generally speaking, the following scales are generally accepted for eCommerce companies:

  • ROAS is equal to or higher than 8:1 we are in the profitability zone.
  • ROAS between 4:1 and 7:1 there is margin to optimize campaigns.
  • ROAS lower than 4:1 means that you should re-evaluate your entire advertising strategy.

This is why:

We recommend setting a ROAS that covers with some margin your costs.

For most companies, especially e-commerce companies, this implies that the ROAS should be close to or above 8.

That is, getting 8 euros per euro invested in PPC.

In our experience, a ROAS lower than 4 means that you should reevaluate your advertising strategy.

If you are in the 4-7.9 range then focus on optimizing your campaigns and there may be significant operational cost reductions for your business.

A PPC audit can reveal key aspects to optimize your campaigns.

Just be sure to keep tracking metrics with the ROAS calculator and optimize opportunities.

In conclusion:

ROAS gives us an indication of how effective an online advertising campaign is by allowing comparisons between different advertising channels, making it easier for us to make quick decisions.

However, this metric presents an incomplete picture of the situation as it does not provide information on the profitability of our campaigns.

That means that you must establish a certain margin of safety if you want to protect your net profit margin.

Therefore, a good ROAS is always accompanied in the medium term by profitability.

Important: ROAS is not a final metric but it is very useful for detecting problems in the paid acquisition channels and that is why we recommend you to use it.

Enlaces y lecturas recomendadas:

Frequently Asked Questions

ROAS is a very widespread advertising performance metric used to detect problems in our campaigns. To learn how to interpret and calculate it, we recommend you to read our article in-depth.

 

That depends on the niche in question and your profitability margin. A good ROAS will be one where we are making more money than our competition and it is profit for the business.