What is ROAS?

Article overview

ROAS (Return on Ad Spend) or the profitability of online advertising expenses, is one of the most important metrics in digital marketing. It measures the effectiveness of campaigns and helps online businesses to improve the performance when it comes to marketing investments.

Starting from the idea that marketing is an investment, ROAS helps us understand the return we get: if I invest a certain amount of money in this campaign, using this marketing channel, and having this digital marketing strategy, how much will I get in return? 

The more effective the campaigns, the more profit will be earned for the amount of money spent. The purpose is to get the highest ROAS possible.

How to calculate ROAS?

ROAS is the total value of the conversion, divided to the marketing cost. 

Conversion Value / Cost = Rentability of Online Advertising Expenses =   Rentabilitatea Cheltuielilor de Promovare Online

The conversion value is the profit generated by a conversion. If you advertise a product that costs 400 RON through an ad that costs 50 RON, the ROAS is 8 (meaning 800%). Each RON invested by this business in digital marketing brings a profit of 8 RON. 

Why is ROAS important?

ROAS is essential when it comes to evaluating the performance of the campaigns. This metric helps in setting up future budgets, strategies and, generally speaking, the whole marketing direction. By doing so, we can make informed decisions regarding future investments, while increasing the efficiency.

The difference between ROAS and ROI

ROAS is similar to another well-known metric, ROI (Return on Investment), but ROAS refers to the money invested in digital marketing, while ROI is about general profits.

Besides marketing costs, there are other associated costs: for generating the products, for human resources and salaries, transportation costs and product exchange or refund.

Therefore, for an accurate image when it comes to the profitability of a business, these operational expenses, adjacent to the selling process, should be also considered: 

ROI = [(Net profit / Total investment) x 100%]

In order to correctly determine the ROAS, we should consider the following aspects: the industry, the profit margin, the CPC (cost per click).

What is the best ROAS you can get?

Even if this is not a 100% accurate answer, considering the fact that ROAS is influenced by various factors, such as profit margin and operational expenses, the reference value is 4: a profit of 4 RON for every 1 RON spent. Depending on the profit margin, some businesses become profitable only if they have a ROAS valued at 10, while others can be profitable even if the ROAS is 3. A high profit margin can sustain a low ROAS, while a low profit margin indicates that the business needs to keep a low advertising budget.

Optimizing the ROAS

• Focus on the buyer
• Keep an eye on the competitors
• Make sure you have a mobile friendly website
• Improve targeting  
• Constantly optimize your keywords
• Optimize the landing page
• Create Branded campaigns in Google
• Adjust your bids 
• Advertise seasonal offers
• Use Exclusions
• Use Google Shopping Ads
• Improve the Ads Quality Score 

ROAS is one of the most important performance indicators for measuring the efficiency of digital marketing campaigns. Hopefully, after reading this article, you now have a clear image on how ROAS is helping you and what are the things to consider for real and optimized results. 

We are looking forward to hearing from you if you need advice on how to optimize your campaigns for a profitable ROAS.

Contact us for a personalized offer.