ROAS, short for Return on Advertising Spend, is an essential metric that needs to be calculated, analyzed, and closely monitored by any company that invests in paid media advertising.
To help you understand everything about this indicator, we’ve prepared a complete guide explaining: what this metric is, how it works, how to calculate it, and in which scenarios it can be used. Check it out!
What is ROAS?
Return on Advertising Spend, or ROAS, is a metric used to measure the profits or costs generated for every dollar spent on an advertising campaign.
This indicator allows you to understand if your marketing strategy is working, which channels and campaigns are bringing the best financial results, and optimize your campaigns whenever necessary.
Why does your company need to track ROAS?
As mentioned earlier, this metric allows your marketing team to accurately quantify the financial results of any campaign and make clear, objective decisions to optimize the return on investment.
Furthermore, these numbers can also be used as a basis for structuring new marketing campaigns, optimizing your resources and reducing expenses to further increase your profit.
How to calculate ROAS
Calculating the ROAS of any campaign is simple; you just need to divide the revenue generated by the total cost of your campaign. For example:
ROAS = Revenue / Cost
Let’s imagine your company invested R$2,000 in an advertising campaign, and this campaign generated R$5,000 in revenue. Simply divide the R$5,000 revenue by the R$2,000 to find that you generated R$2.50 for every R$1.00 invested, totaling a ROAS of 2.5.
If you want to know the percentage return, simply multiply the result by 100. In the example above, the company would have achieved a 250% return on the amount invested in the advertising campaign.
Costs that should be considered when calculating ROAS.
Although it seems like a very simple calculation, for the result to be as accurate as possible, it’s necessary to consider the various costs associated with that marketing campaign, in addition to the cost of the paid advertisement. This involves:
- Labor: Within this calculation, it’s important to consider all costs related to the time and effort dedicated to creating, implementing, and monitoring the campaign. This includes salaries for analysts, managers, designers, etc.
- Agencies/Partners/Suppliers: If you needed an agency, consultancy, or supplier to create the campaign, be sure to include consultancy fees, service costs, and other expenses.
- Tools and Technologies: It’s also necessary to consider the investments made in tools and technologies to make the campaign possible, such as editing software, cameras, automation platforms, etc.
Taking all these investments into account when calculating ROAS is the only way to get an accurate result and find out if that marketing campaign is working as you expected or not.
Difference between ROAS and ROI
Although both metrics are used to evaluate and analyze a company’s investment performance, there are some significant differences between them. See below:
1- Application
- ROAS: This metric focuses solely on measuring the expenses and revenue generated by a marketing or advertising campaign.
- ROI: ROI (Return on Investment), on the other hand, is a broader metric that can be used to measure the return on any type of investment, not just those related to advertising.
2- Calculation Formula
- ROAS: As explained above, the formula is: ROAS = Revenue / Cost.
- ROI: Meanwhile, to calculate the return on investment, the formula is: ROI = (Net Profit / Investment Cost) x 100%.
3- Objective of the Metric
- ROAS: The main objective of this metric is to evaluate the financial performance of advertising campaigns and allow your team to understand whether that strategy generates a return or not.
- ROI: One of the advantages of ROI is that it can be applied to a wide variety of investments and business activities to evaluate the financial return on assets, projects, marketing initiatives, product development, among others.
4- How to Interpret the Results
- ROAS: When the final value is greater than 1, it indicates that the campaign generates more revenue than costs. If it is less than 1, the campaign does not generate enough revenue to cover the advertising investment, indicating a loss.
- ROI: Similarly, a positive ROI means that the investment generates profit for your company, while a negative ROI indicates a loss. The higher the value, the better the performance of the investment analyzed.
Therefore, we can conclude that ROAS is specifically responsible for calculating the financial returns of marketing and advertising campaigns, while ROI is a more comprehensive metric that can be applied to any type of investment.
How can I improve the Return On Advertising Spend of a campaign?
Before discarding an advertising campaign altogether, there are some actions you can take to improve your ROAS. Here are the most important ones:
Analyze the advertisement carefully and modify it if necessary
Carefully analyze your advertising and ask yourself: Is the message persuasive and clear? Are the images used in the campaign interesting and captivating? Are you targeting the ads to the right audience?
Modifying just one of these pillars can be enough to guarantee the success of your campaign and increase your ROAS, without generating unnecessary expenditure of time and financial resources.
Optimize the Landing Page
Make sure your ad’s landing page is optimized to convert leads. Review the landing page to ensure it makes sense, is easy to navigate, loads quickly, and has all the information clearly visible.
Use Relevant Keywords
If your company chooses to use paid advertising through Google Ads, for example, it’s important to select relevant keywords to promote your products or services, as this significantly increases the chances of conversion.
Reduce Waste
Last but not least, identify and eliminate any spending on channels and campaigns that are not generating enough revenue. This involves further refining your target audience, disabling some ads on certain channels, or even reallocating investment to a more profitable campaign.
Have you learned what ROAS is and how it works?
We hope our article has helped you understand what this metric is and how to calculate it, as well as showing how it can influence and allow your company to make clearer and more objective decisions in each marketing campaign.