ROAS calculation: how to calculate your marketing efforts
The term “ROAS” may sound intimidating, but it’s actually a fairly simple concept. ROAS is an acronym for “return on ad spend,” and it’s used to measure the effectiveness of your marketing campaigns. Essentially, it measures how much revenue you made from every dollar that went into advertising. This can include things like Facebook ads or Google AdWords.
ROAS will tell you if a particular campaign was successful or not. But it’s also important to understand how this metric works. So that you know whether or not your e-commerce should continue investing in that campaign or try something different.
What is ROAS?
ROAS stands for return on ad spend, and it’s a metric that measures the success of your marketing efforts. It’s calculated by dividing the total revenue generated by a campaign by the total cost of the campaign. For example: if you spent $1,000 on a campaign, but made $2,000 in sales from that campaign, your Return on Ad Spend would be 200%. (You know how math always works out!)
ROAS is only calculated at an individual level. It can’t be used to compare one company’s ROAS with another company’s ROAS or with its own past performance. It’s also important to note that when calculating ROAS for multiple campaigns within one platform or across multiple platforms, you’ll need to use unique conversion values for each channel so they don’t affect each other’s results!
Why is ROAS important?
ROAS is a great way to understand the effectiveness of your marketing efforts. If you are spending money on your ads, the Return on Ad Spend should be higher than the customer-acquisition-cost (CAC).
The reason for this is that if you have a high cost-per-acquisition but a low ROAS, it means that your cost per acquisition isn’t really worth anything because you are not getting any value from these customers.
What types of businesses can benefit from measuring ROAS?
The answer to this question is any e-commerce that uses advertising. That’s because ROAS is a measurement of marketing performance. So it applies to any business that uses advertising to drive sales.
ROAS can be used by any company looking to measure the effectiveness of their marketing campaigns. However, it’s especially useful for businesses with high-priced products or services. These companies have more room for error when it comes to accounting for revenue. If an expensive product doesn’t sell, there isn’t much room for error in your budgeting process!
If you’re interested in improving the ROI from your marketing efforts (particularly if you have an e-commerce site), calculating return on ad spend (ROAS) may help you understand how well each campaign performs compared with previous ones.
How to calculate return on ad spend (ROAS)
ROAS is a great way for businesses to evaluate their marketing efforts, and it can be used for a variety of different types of companies. From e-commerce retailers to service providers and everything in between, ROAS allows you to see how well your paid search campaigns are performing.
To calculate ROAS, all you need is your total revenue and the total cost spent on promoting that revenue. For example:
Total revenue = $10,000
Total costs = $5,000 (AdWords spend) + $1,500 (Facebook ads) + 500 (display advertising) = $7000
That is how the ROAS calculation formula looks like.
However, calculating ROAS by itself might not give you an actual picture of what your marketing effort means for your profits and the health of the business.
To understand that, you need to look at POAS (profit on ad spend). This metric is far superior in order to calculating the actual value of your marketing dollars.
How to use POAS
POAS is a bit more complicated to calculate unless you have a proper data collection tool. ROAS at first seems pretty straightforward.
However, while the break-even for POAS always will be 1.00, and let’s say a 20% profit margin will result in 1.20 POAS, it is very different for ROAS.
ROAS breakeven depends on all the factors that are not included in the initial calculation. This means that the breakeven will be different for every company, every product, and every campaign. You simply can not compare it as easily as with POAS. And you certainly can’t use the knowledge and your learnings from using ROAS to any degree near that of POAS.
Calculating POAS
Above is a simplified version of how the difference between ROAS and POAS comes into action. While the ROAS breakeven point always depends on the different situations, products, companies, etc, POAS includes the major costs, giving you a much easier-to-work-with overview of what your actual costs are.
Having the POAS breakeven be 1 consistently also means that it allows for the marketers to have more possibilities to compare their campaigns and ads with other campaigns and ads from their own or even different companies. No hidden external factors muddying the waters. No ROAS there to remove the potential to learn, adapt, and improve.
How do I get better data you ask?
Well, short disclaimer, we are a bit biased here. But, a Customer Data Platform, or CDP as people like to call it, contains all this information for you, ready to use in no time. At Custimy.io we created a CDP that requires no technical skills to use. It is made for e-commerce, and you get to reap the benefits from the very beginning of using it.
Imagine not having to manually analyze and calculate your POAS, but just having a crisp dashboard showing you your actual profits and value created for the business right in front of you. Like so many people never having used anything else than Internet Explorer, it might sound like magic, but it really isn’t. It’s just data and an engine doing the hard analytical work for you.
Custimy can give you automated views into your profit margins, so you know which marketing campaigns actually are profitable, and not just the ones driving revenue but no money in the end. It tells you which products are good for your profits, and which ones are bad for business.
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