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What Is A Good ROAS (Return On Ad Spend)?

September 24, 2022 in Advertising

Advertising is unquestionably a great way to reach the masses with your product or service. In this article, we will be describing what a good ROAS is. As the Hindi proverb goes-

जो दिखता है वही बिकता है। 

It roughly translates to – you must show a product to sell it. And to display your product, you advertise.

Now, as valuable advertising is, it is also necessary to track the effects of the advertisement. The main goal of an ad, anyway, is to get revenue. Now, this is where ROAS comes in. 

See Also: What is Customer Acquisition Cost? (How to Calculate CAC & Reduce it)

What is ROAS?

ROAS stands for Return on Ad Spend. It is a metric used to calculate the revenue earned from an advertisement based on the amount spent on the advertising. 

To assess growth, digital advertisers track a variety of measures, including conversion rate, total conversions, CTR, CPM, and CPA, to name a few. Return on ad expenditure is a measure that should never be overlooked, especially when it comes to direct response advertising.

You can calculate this for an individual campaign or total ad revenue based on the total advertising budget.

what is a good roas
Source: Ecoseoexperts

ROAS not only helps in determining the effectiveness of an advertisement, but it also comes in handy to compare the effects of two or more campaigns. 

For example: If an ad, say X, costs 1,000$ and generates sales worth 2,000$ and another campaign, say Y, generates only 1,000$ but it costs only 200$.

We can see that while campaign X can boost sales drastically (twice of campaign Y), it is not very profitable. On the other hand, Campaign Y produces less revenue but has a higher profit margin. 

How to calculate ROAS?

To calculate Revenue on Ad spending, you need to find the ratio between the revenue earned from an advertising campaign and the advertising expenditure. In simpler terms, to calculate Return on Ad Spend, you need to divide the money earned by the money spent on ads. 

Here’s the formula:

ROAS= Ad revenue÷ Ad spend

For example, if a company spends 10,000$ on an ad and earns 20,000$ from it, the company’s ROAS will be:

20,000$(Ad revenue) ÷ 10,000$(Ad spend)

= 2:1

You can also calculate ROAS as a percentage. All you need to do is multiply ROAS into 100.

ROAS% = ROAS * 100

or 

ROAS % = (Ad revenue÷ Ad spend) * 100

For the same example as above, ROAS% will be:

2 (ROAS) * 100

= 200%

calculate roas
Source: Postclick

Let’s take another example if a company generates revenue worth 8,000$ and its expenditure on advertisements is worth 10,000$, then:

Its ROAS will be

8,000$ (Ad revenue)÷ 10,000$ (Ad spend)

=0.8

and ROAS% will be

0.8 (ROAS) * 100

=80%

Now, what does this mean? It means that your company is incurring losses with the advertising campaign. If a ROAS is below one and ROAS% is below 100%, it indicates a failure. 

What is a good ROAS?

In general, 300% is considered a good Return on Ad spending, but it is not a one-size-fits-all scenario. Depending upon the additional costs such as manufacturing of the product, labor cost, transportation, etc., some companies may still be suffering a loss at 300%. 

A good ROAS will be different for different institutions. Return on Ad Spend is mainly determined by the profit margins of the offered product or service, the industry, and the advertising channel.  

A high-profit margin between the cost price and selling price of a product demonstrates that you can afford a low return on ad spend. And a small margin indicates that you must keep advertising costs down to achieve a higher return on ad spend. 

good roas
Source: WebFX

If your margins are high, a 2-fold return might work for you. But if your margins are a little narrow, you might need something close to 5-fold. Say you are earning 90,000$ for a spend of 30,000$. Your ROAS here is 300%. If you have a good margin, this should be pretty profitable. But if you don’t, you should consider cutting ad expenses.

The formula of ROAS based on gross margin would be:  

 ROAS = 100 / margin 

And the formula for ROAS percentage will be: 

ROAS percentage= ROAS*100 

Say, you have a margin of 25%, your ROAS will be 

100/25 (margin) = 4 

And the ROAS percentage will be 

4 (ROAS) * 100 

= 400%

As we see, ROAS here is 4, and ROAS is 400%, your company will need to make five times or 500% for every penny invested. If it earns more, then profit. If your company earns less than that, it suffers a loss.

To put it simply, the higher the ROAS, the better. 

Factors Affecting a Good ROAS

Every company, every industry, and the service-providing firm has a different goal, size, budget, and maturity irrespective of how big/small or old/new the firm is. Every individual firm has its factors affecting the ROAS score as well. 

Before calculating the ROAS, we should know it is directly proportional to revenue generated, meaning the higher the revenue generated through an Ad campaign, the higher the Return on Ad Spend score. 

factors affecting a good roas
Source: KlientBoost

It majorly depends upon the four listed factors;

1)Maturity of the Business

2)Maturity of the website, and 

3)Maturity of the campaigns used.

4)Kind of Ad campaigns used.

See Also: Top 15 Marketing KPIs That You Must Start Tracking

How to Increase Return on Ad Spend Overall Score? 

A Good ROAS is a ROAS with a good score. For some companies, maybe 1:5 could be a good ROAS score, but at the same time, it could be a failure for others. To increase the score, it is essential to know the overall score, the best performing campaign, and what’s not working, then finally shifting and re-allocating the negative factors. It is necessary to study the budget for Ad campaigns and the revenue generated. 

Even though every individual firm has its subjective ROAS scoring ticks, keeping the duration and trend as our focus, it falls under the following three verticals:- 

  1. For Initial Days or New firms- Running Ads on worldwide-known platforms such as Google and Facebook. This will help introduce a website and send signals to the required audiences.
  2. For Long Run and sprawling Firms- Using SEO mechanism. It helps in repairing the website attracts the required audience. Also, it enhances the click-through rates of a website. Hence, generating leads and profit for a firm. 
increase return on ad spend overall score
Source: AdEspresso

Patience is the key to watching the graph grow. It takes a minimum of 4-5 years for an SEO mechanism to work.

To Build a New and Diversified Audience- If a firm has specs and sunglasses as its core product, it can attract a young audience by using social media platforms and conducting on grounds events for campaigning; since it’s easy to reach them this way. 

Also, nowadays, weak eyesight is a growing problem among senior citizens and young ones who are bound to use specs. These trends and patterns must be focused on from time to time and followed to generate diverse audiences.  

See Also: 6 Important Teamwork Skills That Employers Value

What is the difference between ROI and ROAS?

Return on investment (ROI) and return on assets (ROA) are comparable in that they both affect the cost of conducting a company. Marketing tactics entail investments, and when we examine traditional marketing methods, ROIs are used to determine viability.

roi vs roas
Source: Instapage

ROAS is taken into account When looking at the amount spent on advertisements.

ROI

Divide the company’s net earnings by the total investment pumped into the firm to get the return on investment. The ROI may be used to assess the profitability of an entire firm, or it can be done independently for each asset. A marketing effort for a significant occasion, for example, can help assess how successful the company has been.

Executives with the authority to make significant corporate choices are solely interested in ROIs. As a result, their decision-making abilities are swift, as they base their decisions on the profitability of various initiatives. The staff cannot offer helpful input unless additional money is invested in a new endeavor. As a result, ROIs are all about dealing with statistics and assessing a company’s viability and profitability.

ROAS

Now that we’ve established what ROAS is, let’s look at the factors that distinguish it from ROI. In contrast to ROIs, ROAS utilizes revenues to compute advertising expenditures for starters. Second, it only takes into account the amount spent on advertising directly. Other aspects of the business, such as expenditures and expenses, are not considered. 

As a result, ROAS indicates if a company’s digital advertising efforts have increased impressions, clicks, leads, and, ultimately, revenue. Every advertising effort will prove outcomes in terms of value in this manner. If your marketing department makes sound judgments, this measure will not be relevant.

See Also: 6 Best B2B Marketing Strategies to Follow in 2021

FAQs

What is a Strong ROAS?

If the ROAS is good or bad is influenced by profit margins offered by the product or service and the advertising company.

What is a Good ROAS for Google Ads?

Values above 400% or a return of 4:1 are considered as good ROAS for google ads. However, some businesses aim higher, as generating higher ROAS results to a higher google ad budget giving them scope to drive results for their company.

What is ROAS target?

Target ROAS is the average conversion value a business would like to attain for every penny spent on advertisements.

Conclusion

Return on investment (ROI) is the holy grail of internet marketing. Before taking a search budget from a customer, be sure you have one to hit.

When it comes to an end, you’re better off accepting no search budget and instead focusing on other search channels like social media platforms, which may deliver a similar ROI at a lower cost.

See Also: Top 10 Best URL Shorteners To Shorten Long URLs

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Radhika Gupta More posts by Radhika Gupta

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