What Is ROAS in Digital Marketing and How to Calculate It

When you engage in digital marketing, how would you run the process? You’d want to know if it’s paying off. This article will let you know how.

All businesses use metrics to measure how effective their advertising campaigns are. One of these is called Return On Ad Spend. By mastering ROAS, you’ll know which advertising channels and strategies will generate more revenue. 

Take control of your budget and maximize your profit by learning all about ROAS in the paragraphs below.

Introduction to ROAS (Return on Advertising Spend): Definition and Impact

ROAS measures how effective your advertising campaign is in generating revenue. This way, it lets you evaluate which marketing strategies work well for your campaign level. It also lets you allocate your budget to these working strategies.

India’s digital advertising market is experiencing rapid growth, making ROAS an important metric for Indian businesses to measure the effectiveness of all online advertising efforts.

Unlike other metrics like clicks and impressions, ROAS drives straight into showing you the actual sales you get from your ads. So instead of targeting a certain number of clicks, you can target a specific ROAS that works for you.

The more effective your advertising messages, the more revenue you’ll earn from each dollar of ad spend. That means the higher the ROAS, the better. 

Key Differences Between ROAS and ROI (Return on Investment)

Return on Investment probably sounds familiar, but it is not the same with ROAS.

ROI and ROAS have their differences. ROI measures any investments including advertising, but not limited to it. It also includes many other costs, not just advertising costs.

For example, in ROI you’d include the cost of your employees’ wages, materials for logistics, utilities for functionality, and various other business needs.

On the other hand, ROAS specifically focuses on the performance of advertising campaigns. It has no other metrics than the money you spend on ads and the money you get from ads.

Thus, ROAS is a type of ROI measurement specifically for digital marketing ads.

The Role of ROAS in Measuring Advertising Effectiveness

ROAS is a financial-focused perspective on the success of your campaigns. It’s directly tied to the revenue generation of your digital marketing efforts. Also, it provides a quantifiable measure of efficiency and enables you to compare across different advertising channels.

ROAS is thus important for any business in India to learn, from small one-person businesses to cooperatives. To learn how to do ROAS, take note of the rest of the article.

Calculation Formula for ROAS

You may think it’s difficult to compute such a powerful metric, but it’s not. The ROAS formula is quite simple. You just need to divide the conversion value by the ad cost of your campaign. 

Here is how to calculate Return on Ad Spend (ROAS):

Total conversion value/Ad Cost = Return on Ad Spend

“Conversion value” refers to the amount of revenue from a given conversion. It’s also referred to as “Revenue generated from ads” or “Total revenue from campaign,” or something along those lines.

You can express ROAS as a ratio too. For example, if it costs you 200Rs for you to sell a 1000Rs product, your ROAS is 5. That would be 5:1. 

So for each rupee you spend on ads, your business earns 5Rps back.

Several websites offer free ROAS calculators. To find them, just search “ROAS calculator” on your web browser. Then input your total revenue and ad spend to automatically compute your ROAS. With an online ROAS calculator, revenue ratio will be determined quickly. It might be expressed as a ratio or a percentage.

You can also calculate ROAS using a simple formula in a spreadsheet program. Enter your revenue and ad spend data into separate cells. In another different cell, enter the formula: 

ROAS=Total Revenue/Total Ad Spend.

Gathering Data for ROAS Calculation

The total revenue and the total amount you spent on ads should be accurate to measure ROAS. This process may be more complex depending on how you track your data and how complicated your marketing tools are.

The first thing you have to do to gather your data is to identify which advertising channel you want to analyze. Then choose a specific timeframe in which you want to calculate ROAS.

The data of how much you spent for an ad campaign should be found right in the advertising platform’s dashboard. 

You should look for:

• Total conversion value. This is the value associated with the conversion actions associated with a campaign. In this case, the conversion action is most likely a sale, and the conversion value is the amount of revenue earned from your ad campaign.
• Ad cost. This is the amount you spent on running your marketing ads on that specific channel, for a specific period. 

Accuracy is key. Make sure you have the right data in calculating Return on Ad Spend so you can gain fruitful insights into how effective these ad campaigns are.

Interpreting ROAS Results and Benchmarks

Once you have your ROAS, it’s time to interpret what it means. 

Look at the ratio of your ROAS. A high ROAS is better. A ROAS greater than 1 means that you generated revenue and got a return on your ad spend. Less than 1 means you’re losing money.

How much ROAS is a good ROAS? Well, it depends on your industry. You can research the average ROAS for your specific industry to determine how much is an acceptable ROAS. However, this can be difficult to find, as industry averages differ per product, market segment, and industry.

Platforms are a more reasonable baseline benchmark. There are generally agreed-upon ROAS averages. 

Here are the averages for the e-commerce industry for each popular ad platform:

• Google Ads – 13.76;
• Facebook Ads – 10.68;
• Instagram Ads – 8.83;
• Amazon Ads – 78.95;
• Twitter Ads – 2.7;
• Pinterest Ads – 2.7;
• TikTok Ads – 2.5.

In general, your target ROAS should be set based on your profit margin goals. You would want an overall ROAS that can cover ad spend and generate profit.

A common benchmark is a standard starting point for evaluating your performance. When you exceed the benchmark, it suggests your specific ad campaign was successful. But don’t rely solely on benchmarks. Focus on your specific business goals and profit margins.

Factors Affecting ROAS Performance

There are so many factors that can affect ROAS. Knowing these can empower you to take a proactive approach to managing your advertising efforts and identify areas for improvement. 

Here’s a breakdown of all the things you should watch out for:

• Campaign targeting and strategy. Misdirected campaigns will generate lower click-through rates and conversions. Therefore, your campaign should have a compelling offer to get their attention.
  
• Budget management. Your bidding strategy will tell how much you’re willing to pay for clicks or conversions. You should furnish your strategy to allocate your budget across separate ROAS, different ad groups, channels, and campaigns that can improve ROAS.
  
• Creative ad design and quality. High-quality, eye-catching advertisements get attention. This factor alone can increase click-through rates, boosting your ROAS.
  
• Customer perception. This is how you present your brand can influence their perception. Consider also the long-term value of your customers. Even if a campaign has a lower initial ROAS, it might be profitable if it acquires high-value customers.
  
• Technical considerations. A slow-loading landing page will disappoint customers and cause them to abandon their initial interest in your products. Other factors like broken links and user interface complexity can also make an impact.
  
• External factors. Factors like market competition and seasonal trends also affect ROAS performance. Increased competition can drive up advertising costs, and consumer buying habits can change throughout the year.

Turning a blind eye on these factors will lead to significant disadvantages. Wasted budget and missed opportunities for improvements are just a few of these disadvantages.

On the other hand, acknowledging these factors will ultimately enhance campaign performance and conversions. It equips you with the knowledge and insights to manage your advertising campaigns effectively.

ROAS Calculation for Different Advertising Channels 

Whether you’re running an advertising campaign in India or any other country, in Google Ads or any other platform, the process of ROAS calculation remains the same. What differs is how complicated it can be to calculate your total revenue and the total cost you spent on your chosen marketing channels and tools.

Here’s a simple difficulty scale:

• Calculating the ROAS formula: Easy and consistent among different advertising channels.
• Attributing revenue to specific campaigns: Easy (if you have a clear tracking ROAS set up) to moderate (if you need more analyzing of other factors like customer behavior and separating the influence of different marketing channels).

ROAS is a user-friendly metric. Its process is the same across different advertising channels and the globe, and the complexity of gathering your data depends on the advertising channels and tools you use.

ROAS Optimization Strategies

You’re not just limited to reactionary measures such as calculating the ROAS of a strategy that you already implemented. You can also improve your ROAS and get more out of your advertising investment. You can do that with these smart strategies.

Here are the key strategies you can use across different areas.

• Audience optimization. Know your audience and their interests well. In India, consider language preferences and cultural nuances. Also, utilize ad platforms that target users similar to your high-value customers and retarget campaigns to reach users who already had an interaction with your brand in the past.
  
• Budget management. Focus your resources on campaigns that deliver the highest ROAS. Also, experiment with different bidding strategies within the chosen ad source.
  
• Ad creatives. Conduct A/B testing on different ad creatives to see which kind resonates best with your target audience.
  
• Landing page. Your landing page should provide a great user experience and the message conveyed in it should be aligned with your ad.
  
• Monitor the campaign. Regularly monitor campaign performance metrics such as ROAS, clicks, and conversions to identify areas for improvement.

These strategies will help you maximize your ROAS and achieve your profit goals. These strategies offer a lot of benefits. Ultimately, these benefits can stack up and help you achieve sustainable growth in your advertising activities.

Tracking and Attribution Methods for ROAS Calculation

Tracking and attributing your sales is the most hassle part of the ROAS calculation. 

Here are common methods for tracking your revenue:

• E-commerce platforms. Most of these advertising platforms track revenue from orders initiated through ad clicks.
  
• Coupon codes. You can create coupon codes specific to your ad campaign and track how much they are used.
  
• UTM parameters. You can also opt to use UTM parameters to the ad URLs to track conversions in analytics tools like Google Analytics.

When a customer purchases, they’ve likely interacted with multiple campaigns beforehand. So which ad deserves credit for the revenue it brought in? Where is the revenue attributed? To answer this, there are several attribution models you can use to address this issue. 

These are:

• First click attribution. Attributing the conversion entirely to the first ad the user clicked on. This might be undervaluing the other ads the user clicked on after the first one.
  
• Last click attribution. Attributing the conversion to the last ad the user clicked on before making a purchase. This might be undervaluing the other first ads the user clicked on.
• Linear attribution. GIves equal credit to all ads the user clicks on before purchasing. It may be fair, but doesn’t account for the different influence each ad might have had on the user.
  
• Position-based attribution. Attributes the conversion between the first and last ads to give credit to the interactions made in between.

The right method for tracking and attributing sales depends on your specific advertising goals. Moreover, choose a model that’s feasible given your current data tracking capabilities.

By following these tracking and attributing methods effectively, you can know the revenue earned. This important data will impact your ROAS, so make sure it is accurate.

Evaluating ROAS in Relation to Business Goals and KPIs

If your ROAS is high, it is typically a good sign. But, it might not always be the ultimate indicator of success. You will need your ROAS to be evaluated based on what your business goals and KPIs are.

A low ROAS might be successful if it contributes to future sales. Additionally, it is also okay if ROAS is low but can generate high-quality leads. 

Simply put, if your business goal is brand awareness and lead generation, a lower ROAS that contributes to customer acquisition and delivers high-quality leads is more valuable. Your campaign might build brand awareness or nurture leads over time before generating conversions.

Your advertising efforts often have a cumulative effect. So, evaluate ROAS data within the context of your long-term advertising strategy.

Limitations and Considerations of ROAS as a Performance Metric

Like all the other metrics, ROAS has its own limitations to consider. 

ROAS only looks at ad spending but doesn’t factor in other ad costs like operating expenses or vendor costs. This can hinder the comparison between the efficacy of campaigns with different cost structures.

It also doesn’t account for all revenue. It really only focuses on ad clicks. You might not capture sales influenced by other marketing channels or organic traffic. 

One thing to consider is to not rely solely on ROAS. Utilize other metrics like click-through rate and PPC metrics to gain a more comprehensive view of your advertisements.

Final Thoughts

Digital advertising is booming and has become crucial for business growth. However, it poses a big challenge if you can’t gauge its effectiveness. 

Now that you’ve learned the ROAS metric, you have obtained the knowledge to overcome this challenge. Understanding this metric and how to calculate it will ultimately drive a greater return on your investment.

Instead of relying on blind hope, start your digital marketing journey with the right knowledge and metrics to increase your chances of generating profit.