How to Calculate ROAS and Optimise Your Ad Spend

Knowing how to calculate ROAS (Return on Ad Spend) helps you see exactly how much money your ads bring in for every dollar spent. 

As a business owner, ROAS helps you make smart decisions, bigger profits, and strategies that actually deliver results. Here is a breakdown of how to calculate it and some other important stuff about ROAS. 

What is ROAS and Why It Matters

ROAS or return on ad spend is the best measuring tool to show how much your ad spent vs revenue generated through it.

The formula is simple: 

Revenue from Ads ÷ Ad Cost. 

For example, if you spent $1000 on ads and made $5000 in revenue, your ROAS would be 5:1, meaning you earned five for every dollar spent.

This metric assists your businesses in identifying whether your ads are working and generating profit or are falling short and wasting away your budget. 

Unlike ROI, which considers all business expenses, ROAS focuses only on ad spending which brings revenue and offers savings. Monitoring it guarantees better controlled and more effective marketing.

How To Calculate Roas

Start with the Formula

The easiest method to evaluate the Return on Ad Spend (ROAS) is utilizing the following formula:  

**ROAS = Revenue Generated from Ads ÷ Cost of Ads**  

This calculation yields a basic ratio that indicates the revenue earned to every dollar spent. For example, if your ads earned $10,000 and the expenditure on ads was $2000, your ROAS would be 5. This means for every dollar you put in, you’re earning $5.

Alternative marketers have different versions of the formula. Here’s one you might consider:  

ROAS = (Revenue Generated from Ads ÷ Cost of Ads) × 100

This version gives you a ratio calculated as a percentage. Taking the same example above, calculating ($10,000 ÷ $2000) x100 would give an ROAS of 500%. Though the calculation remains constant, it is the presentation that differs.  

Which Formula Is Better?

Each format serves a purpose, however, businesses designate which will be used depending on how they want to present data.  

In terms of marketing and communication, ratios (for example, 5 or 10) are much more user-friendly as they allow you to express intuitively. In this case, we earned 5 times our ad spend.

Figures such as 500% are easier to read and comprehend for non-financial professionals. Better than incomplete explanations and vague formulas, the presentation works satisfactorily on two points: intuitive and relevant. 

To make it easier for laymen, visualize it even more after converting it to a picture or graph.

For day-to-day purposes, taxis can also be treated as a normal ratio. For declaiming presentations, percentages or pure numbers work depending on the audience.

Gather Accurate Numbers

You need two key figures to calculate a predefined amount. No matter which formula one decides to utilize, Revenue from Ads and Ad spending have to be calculated individually.

• Revenue from Ads can only include the revenue stemming from your ad campaigns. One needs to be careful when claiming ad revenue as it could misrepresent the performance.
• Ad Spend refers to campaign cost as a whole level. It includes ad platform spending, creative production, and other ad-related expenses.

Avoid burdening results with inaccuracies and they will always remain completely reliable. 

Let’s Apply It to a Real Example

Let’s imagine you’ve uncloaked a paid search campaign for an online furniture store you own. You spend $3000 on ads that make $12000 in sales.

Here’s how we calculate ROAS from the two representations.

Using ratio representation: ROAS= $12000 : $3000 = 4

You get 4 dollars for each dollar spent.

Using percentage representation: ROAS = ( $12000 : $3000 ) x 100 = 400%

The campaign achieves 400% of its spending.

Both figures tell the same story; the only difference lies in how you choose to interpret them. 

Analyze the Results

Interpreting your ROAS is just as important as the number. A ratio of 4 or a 400% ROAS is without a doubt an excellent figure, but anything less than 2 (or 200%) suggests that your campaign is not performing profitably.

To figure out what is acceptable, look at your ROAS in comparison to industry averages or your own business goals. For example, e-commerce companies can expect a ROAS between 3 and 4, but products with high margins may only need a ratio of 2 in order to be profitable.

Key Benefits of ROAS for Businesses

Here are some key benefits of ROAS: 

Real-Time Performance Tracking

Watching ROAS during a campaign helps businesses change how they target, message, or bid in real time. If an ad doesn’t perform well, you can make changes before wasting the budget, keeping campaigns efficient.

Data-Driven Decision Making

ROAS takes out the guesswork from advertising decisions. Rather than depend on instinct, businesses can look at ROAS on different platforms and figure out which ones yield the best returns. This guarantees that every cent on advertisement will be used wisely.

Tracking Profitability and Growth Opportunities

A campaign is most likely profitable if the ROAS is higher than break-even, and a campaign with lower ROAS puts the advertisement at a risked revenue loss. 

Regularly tracking ROAS can help companies identify ads that yield impressive return values and those that need adjustments.

 Over time, trends emerge- certain platforms, ad types, or product categories may perform better consistently. Companies can use these insights to refine their strategies and maximize revenues.

Pinpointing Areas for Improvement

A low ROAS often points to specific weaknesses in an ad campaign, such as:

• Audience targeting (wrong users targeted)
• Weak creatives (ads are not engaging)
• High cost-per-click (CPC) (excessive ad costs with low returns)
• Low landing page conversion rate (issue with the landing page)

By identifying these areas, businesses can make targeted improvements to increase their ROAS.

What is a Good ROAS?

Answering this depends on some parameters. 

Industry Benchmarks for ROAS

A “good” ROAS would need to be different for each industry or even business model. For instance, in eCommerce, a common ROAS would be 3-4, whereas in automotive or real estate, the numbers would tend to be lower because of expensive purchases and prolonged sales cycles. 

Repeat purchases as well as strong online demand contribute to higher ROAS for beauty and fashion brands which ranges from 5 to 8.

Average ROAS by Industry

• E-commerce: 3-4
• Automotive: 2-3
• Beauty & Fashion: 5-8
• B2B Services: 2-3
• Consumer Electronics: 4-6

High-performing industries like digital products or software (SaaS) often see ROAS above 6, as their costs per sale are lower than physical goods.

Factors That Influence a Good ROAS

Business model differences play a big role in defining what’s considered good. Companies also having high margins, such as the software industry, can afford to sustain a lower ROAS, while the retail industry needing to be more profitable, would aim for higher ROAS.

AD goals also influence expectations for ROAS. A campaign driven by sales would have a higher aim for ROAS, but for brand awareness, a lower return would help with long-term growth.

Examples of Realistic ROAS Targets

• New product launch: ROAS of 1-2 (building awareness).
• Direct sales campaign: ROAS of 3-5 (generating profits).
• Retargeting ads: ROAS of 5+ (maximizing conversions).

The optimal ROAS relies on the goal, market situational, and overall cost structure. Companies should rather analyze the value over the period instead of fixating on one value.

How to Improve Your ROAS

Let’s find out the ways your business can increase ROAS. 

Optimize Ad Targeting

Improving targeting guarantees the ads are shown to the customers with a greater chance of converting. Use platform tools to divide audiences according to demographics, interests, or behaviors. Retargeting those who were previously visited can have higher chances of converting and at a much lower cost.

Improve Ad Creatives

Compelling visuals and persuasive copy result in higher click-through rates and ROI. Clear CTA encourages action. Interactive elements, videos, and images grab attention like nothing else.

Refine Landing Pages

A well-created landing page not only engages visitors but is also designed to increase sales. 

Be sure that the pages load fast, are mobile-friendly, and correspond to the advertisement’s offer and messaging. Improving conversion rates can also be achieved through a streamlined checkout process.

Test Different Ad Formats

Find out which ad types resonate more with your audience and tailor accordingly. Based on the target audience and type of product, carousel ads, video ads, or static image ads are likely to perform differently. 

A/B Testing helps to figure out what variations work best.

Analyze Campaign Data

Doing a thorough analysis of click-through rates, conversion rates, CPC, etc., helps you debug why certain ads, audiences, or platforms are underperforming. 

Fine-tuning ad budgets based on these changes improve return on ad spend (ROAS) with time.

Focus on High-Performing Ad Platforms

While the majority of advertising platforms claim to have high returns, in reality, that is not the case. Find the highest ROAS and move the budget toward that. 

For instance, the ROAS on Facebook Ads is 5.0, while it is only 2.5 for Google Ads. By review, Facebook advertising will always be the preferred platform to spend on as it offers a greater profit-to-cost value.

Adjust Bidding Strategies

Effective ad bidding will certainly assist in lowering advertising outlay, while simultaneously increasing ROAS. This can be done through manual bidding for CPC or implemented ROAS strategies. 

Always ensure that the budget is spent where it will achieve the greatest returns. Reducing bids on poor-performing keywords, while placing greater bids on well-performing ones.

Limitations and Challenges of ROAS

Neglects Other Business Expenses

ROAS is a measure of advertising efficiency, but in this case, part of the profit is left out. It does not consider costs of the product, general administrative expenditure, cost of doing business, and operational cost expenses. A campaign with a high ROAS is very likely to turn unprofitable if there are uncontrolled costs in the background.

Ignores Customer Lifetime Value (CLV)

While some businesses profit by repeat purchases, ROAS does not track this. If the ad generates a loyal customer who significantly increases their purchase volume over time, the return is much higher than what is captured and represented through ROAS.

Trouble Spots in Analyzing Revenue Attribution

Before deciding to make a purchase, customers tend to interact with a series of touchpoints like social media, SEO, emails, and visits. 

Furthermore, ROAS is only beneficial for businesses with uncomplicated sales funnels. This is because it only credits revenue to the last ad interaction.

Limited Knowledge of Brand Awareness and Indirect Sales

A business does not have to directly intend for sales in every advertising campaign. Some ads focus on generating leads or executing brand awareness, which may incur losses on the ROAS scale but pay off in conversions down the line. 

It is therefore reasonable to assume that relying on ROAS might not be wise.

Roas Varies Across Industries and Business Models

The measure of what qualifies as low or high ROAS varies with profit margins, pricing, and industry standards. 

A luxury brand might be making profits with a ROAS of 2.0, but retail eCommerce brands will need higher than 4.0 to even begin breaking even on their low margins.

Fails to Consider Market and Seasonal Changes

Because of seasonal demand and competition, ad performance is subject to change. It is common to have higher ROAS during peak shopping seasons and lower during the off-season. 

The danger in relying on just one ROAS is that, without context, it can be extremely misleading.

Leads To A Risk Of Over-Cutting Advertising Spending

The absence of adequate return on ad spend (ROAS) does not always equate to failure for a particular campaign. Some advertisements may need optimization as they may need some form of retargeting or even some better-performing advertisements. 

If cutting out on spending on advertisements is done too early in the hope of growth, then such spending can be regrettable.

ROAS vs Other Marketing Metrics

ROAS vs ROI (Return on Investment)

The primary focus of the ROAS metric is advertising, for it will only analyze revenue earned in proportion to the dollar spent on ads. Therefore, it is apparent that used advertising as a tool can give direct revenue, and help some businesses determine if their ad spending is feasible.

In contrast, the scope of ROI includes other business phenomena like product engineering, employee salaries, and office rent among many others. 

A business-driven campaign featuring a high ROAS and bearable low ROI will often lead to the conclusion that selling ads generates revenue, but due to high costs profits are low.

Take, for instance, an e-commerce business that spends $10,000 on ads and earns $40,000 in revenue; thus they have an ROAS of 4.0. 

However, this can change drastically should production, shipping, and overhead costs total $35,000; thus their ROI may be significantly lower or even negative. That is why businesses need to look at both ROAS and ROI because each informs decisions differently.

ROAS vs CPA (Cost Per Acquisition)

Cost per acquisition (CPA) and return on advertising spend (ROAS) differ in what part of advertising performance they evaluate. ROAS looks at revenue generated for every dollar spent, while CPA evaluates the cost of obtaining a single customer or lead.

Each metric can stand alone for a campaign comparison, although both are critical to success. ROAS determines if the value of the ad is profitable, while CPA reveals the efficiency of acquiring new customers.

For example, a company spends $1,000 on ads and gets 50 customers. The CPA is $20 per customer. Those 50 customers, however, generate $5,000 in revenue which makes the ROAS 5.0. A low ROAS in combination with a low CPA may indicate that while customers can easily be acquired, they are not spending sufficiently to deem the campaign beneficial. 

In these scenarios, businesses might need to consider targeting more valuable customers or increasing the pricing.

ROAS vs CTR (Click-Through Rate)

With CTR stands for click-through rate, it represents the number of users who click on an ad to the number of people who view the ad. A high CTR indicates that the copy and visual of the ad are engaging, however it does not convert into making purchases.

Having a high ROAS indicates that an advertisement campaign was effective, while a low ROAS indicates that less effort was put into it. 

A high click-through rate means many people are clicking on the advertisement, but are not making purchases, which might indicate underlying issues with either the product landing page, pricing, or target audience.

For instance, for an advertisement that has a 5% CTR and generates low revenue from the ad in comparison to the spent dollars, the ROAS will be lesser. 

On the contrary, advertisements with low CTR, but high ROAS are likely to perform better as only fewer people click the advertisement, hence making them more likely to convert.

CTR is useful for calculating ad engagement, but ROAS is essential for measuring actual revenue impact. Businesses should use both metrics together to refine their campaigns for better efficiency and profitability.

The below comparison table might give you a better idea. 

Frequently Asked Questions About ROAS