ROAS Formula – How to Calculate
Return On Ad Spend is your revenue divided by your ad spend.
ROAS = Revenue / Ad Spend
The Return on Ad Spend (ROAS) equation is used to measure the efficiency of an advertising campaign by calculating the ratio of revenue generated to the amount spent on advertising. The ROAS equation is calculated by dividing the revenue generated by the ad spend and expressing the result as a percentage. For example, if a campaign generates $500 in revenue and the ad spend is $100, the ROAS would be 500/100 = 5, or a 500% return on ad spend. A high ROAS indicates that the campaign is generating a good return on the money invested in advertising, while a low ROAS suggests that the campaign may not be as effective at generating revenue. The ROAS equation is often used by advertisers and marketers to evaluate the performance of their campaigns and make decisions about where to allocate their ad spend in the future.
How to Improve Return on Ad Spend
ROAS is a measure of how efficient your campaigns are in your ad account. Not all accounts will have the same ROAS so it’s not wise to compare your ROAS with the ROAS of a different product, service, or company. However when all else is equal, improving your ROAS means you’re either increasing your companies revenue without increasing ad costs, or it means you’re decreasing ad costs relative to revenue per unit.
If you are unable to track revenue in your Google Ads or other accounts, use CPI (conversions per impression) as the next best measure of success.
Ways to Decrease Ad Costs to Improve ROAS
Reducing costs in your ad account will improve the denominator of the ROAS calculation. One of the most surefire ways to decrease costs is to identify what parts of the ad account algorithms enable you to bid lower and still win auctions. For Google Search Ads, higher quality score allows you to win auctions at a lower cost. Improve your quality score by increasing CTR, ad relevance, and landing page relevance. There are also hidden factors that go into Google’s ad rank, so try to identify those factors.
Lowest hanging fruit to decrease costs to improve ROAS: Eliminate fraud and bad traffic. Fraud is a major problem in digital marketing, and you don’t really know how much fraud is impacting your ad account until you investigate and try to remove it. Some fraud protection programs will cost you the same as a couple of clicks a month, while cutting out hundreds or thousands of bad clicks a month. The savings are immediate and enormous or you can simply stop paying.
Finally you should split test all kinds of bid amounts, bid settings and campaign structures to attempt to hone in on the most efficient cost per clicks or cost per impression. For online products it can be easy to connect revenue to the ad spend. For offline products and sales, there are some methods such as geographical ROAS measurement that can come in handy.
Sometimes something as simple as changing bidding models can save you 20-30% in costs. However you also should look out for the opposite scenario of increased costs, which is why you should run experiments to improve ROAS.
Ways to Increase Revenue to Improve ROAS
The other part of return on ad spend calculation is revenue, and we want more revenue. The key is to optimize your ad campaigns to improve conversion rate overall on every step of your company’s marketing and sales funnel.
Determine conversion rate with this CVR Calculator
Total revenue is calculated by the number of units sold multiplied by the sales per unit. Of course only the units sold that are attributed to your ad account should be included in the ROAS calculation. However you can increase revenue by either increasing the number of units sold at the same ad cost, or by increasing the sales value of each unit.
Testing an abundance of qualifying and relevant language in your ads can help improve conversion rate and in some cases the amount of sales per unit, but of course watch out for the impact on costs if your quality score takes a hit.
Always be testing and improve your website, sales flow, and especially the language you’re using with consumers. There are tools that can help you take your conversion rates to the next level with frequent testing.