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What is ROAS (Return on Ad Spend) and How to Calculate It

Last updated: Jan 15, 2024

What is ROAS (Return on Ad Spend) and How to Calculate It
Cover image: Illustration of ROAS (Return on Ad Spend).

What is ROAS?

ROAS is Return on Ad Spend, an important metric in digital marketing that provides an overview of how efficiently a company invests in online advertising or digital campaigns.

Marketing ROAS can measure the amount of revenue generated for each unit of currency spent on advertising. With this metric, you can review the cost-effectiveness of the expenditure on ad production.

Moreover, you can delve deeper into the performance of each ad, such as the level of influence or profit it generates for the company. Every business owner aims for profits that match or even exceed the effort and costs invested, right?

Therefore, this metric is a suitable method for measuring both of these components. If you want to learn more about what is ROAS, its functions, and how to calculate it, be sure to follow the discussion below to the end.

Why is ROAS Important?

After understanding what is ROAS, you certainly should not overlook how essential this metric is, especially when discussing marketing strategies in the digital realm. 

Here are some reasons why this metric is considered an undeniable determinant of business success.

It is not just a number. It is a metric that can define how well an advertising campaign can generate profits proportionate to its expenses.

This metric also guides businesses, especially marketing teams, to evaluate whether investments in ads have added significant value.

With a high return on ad spend, companies can ensure that their marketing funds are used efficiently and yield optimal return on investment.

Additionally, this marketing metric can also offer new perspectives on the reach and engagement rate of the target audience, allowing the involved teams to adjust innovative strategies to enhance future performance.

ROAS Functions

In addition to ensuring that advertising profits are commensurate with the effort and costs expended, it also serves other functions, such as:

1. Measuring Investment Efficiency and Budget Allocation

As mentioned earlier, this metric can help companies measure the ratio of investment funds to revenue generated through advertising. 

In other words, by calculating return of ad spend, companies or business practitioners can assess the efficiency of their campaigns and make more informed and strategic decisions regarding budget allocation.

2. Campaign Optimization Efforts

Through the evaluation of return on ad spend in each advertising campaign, sales marketing teams can identify areas with conversion potential and areas that require improvement or performance enhancement

It can also help to adjust and optimize ongoing campaigns, responding to changes in the market, consumer trends, or other factors that may influence advertising results. 

3. Identifying the Most Suitable Advertising Channels for Business

Recently, many digital platforms have ad features to assist businesses in marketing their products, services, or campaigns. 

From e-commerce to Meta (Facebook Ads and Instagram Ads) and Google Ads dominating the online search space. 

In this regard, it helps businesses evaluate the performance of ads on various platforms and identify which channels are most effective or suitable for their target audience.

4. Data-Driven Decision Making

This metric can helps businesses make decisions not solely based on intuition or experience but also on concrete facts generated by advertising performance. 

In the highly dynamic business world, making data-driven decisions this metric is a powerful strategy to minimize risks and uncertainties, ensuring that marketing activities remain effective and measurable.

5. More Efficient Financial Reporting

For businesses, financial transparency and accountability are crucial. Therefore, managing financial reports becomes a primary focus that should not be underestimated. 

If you know how to calculate return on ad spend, you can determine the return on investment for each advertising campaign. This ensures that the prepared financial reports are more accurate, efficient, transparent, and informative.

Formula on How to Calculate ROAS 

You have learned about the definition and its functions in digital marketing activities.

If your brand or company wants to determine whether the produced ads are yielding results, you can ensure this by calculating result on ad spend.

The formula is as follows:

In addition to the formula above, there are several conditions applicable to this metric, such as:

1. Results = 1

If the return on ad spend result is equal to 1, it indicates that advertising expenses are equal to the revenue generated. 

In this context, the company may reach a breakeven point, where advertising costs are equivalent to the revenue obtained. 

How to handle: optimize the ads to maximize their performance and generate more profits.

2. Results > 1

If the result is greater than 1, it is a positive indicator. This means that the advertising campaign has successfully generated more revenue than the costs incurred. 

The higher results means the more efficient the ads are in providing a return on investment.

3. Negative Result (-):

Conversely, if the result is negative, it serves as a warning signal for your business. A negative result indicates that the revenue generated from the advertising campaign is less than the costs incurred. 

This situation could be caused by various factors, such as inaccurate audience targeting, ineffective ad messaging, or unsuccessful offer and call-to-action (CTA) strategies in the ads.

Study Case on How to Calculate ROAS

This strategy can help you determine whether the expenses incurred for advertising are yielding results or not. 

To better understand the concept of return on ad spend, let’s explore the following case study example: 

Furniture Store A spent $200 on advertising on a social media platform. After the ad ran for 1 month, they generated revenue of $800. Now, what is the return on ad spend value obtained?

ROAS  = Revenue / Ad Spend

= $800 / $200

= $400

Therefore, the return obtained by Furniture Store A is $400, which is equal to 4:1. This indicates that for every Rp1 spent by Store A, they successfully earned a profit 4 times greater. 

In this case, the ad performance can be considered successful because the placed ads generated profits for the store.

How to Improve ROAS

Strategies to enhance return on ad spends include:

  • Ensure the copy in the campaign aligns with the target audience and creates a sense of urgency.
  • Maximize the business landing page.
  • Narrow down the target audience by balancing accuracy and reach.
  • Pay attention to the accuracy of the data and metrics used. Make sure you include comprehensive data on both revenue and expenses.

What to Do If Return on Ads is Low?

There are two main things to do if the business's return on ad spend is below the target:

  • Conduct Analysis: Analyze the cause of it. For example, assess whether your advertising costs are too high, if your target audience is not accurate, or if your ads are ineffective.
  • Trim Advertising Costs: In some cases, the distribution of advertising expenses may be disproportionate across different campaign channels.
  • A/B Testing: Conduct A/B testing by comparing two different versions of a campaign (A and B). This helps identify which variables have a more positive impact on ROAS.

Remember! While a high return is desirable, not all ads need to achieve a high return ad spend. 

You should still consider the goals of the ad—whether it's to increase sales or raise awareness of a newly released product or service.

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