ROAS, or Return on Ad Spend, is a metric that’s been on the scene for a long time but still remains underutilized by advertisers today.
Unfortunately, that can mean a costly mistake in 2023.
In this guide, we’ll cover what the almighty ROAS formula is and why you can’t afford to ignore it. We’ll also cover the steps you can take to improve it today.
What is ROAS in marketing?
While you probably see the term ROAS everywhere, you might not know exactly what it means.
ROAS stands for Return on Ad Spend. In short, it allows advertisers to calculate how much money they're getting in return for their advertising efforts. It's like a trusty compass guiding marketers and showing you which advertising methods are really hitting the mark and where there's room for improvement.
While you may be wondering how a metric you've never heard of could be so important, there are a few key reasons why it's a must-have for marketers in 2023:
- Helps to measure performance. ROAS allows you to assess how well your campaigns are performing. By understanding this metric, you can see if your marketing efforts translate into real revenue. If they aren't, it's a sign that it's time to tweak or entirely rethink your strategy.
- Improves ad optimization. Understanding your ROAS can help you identify the most successful advertising channels and campaigns. This information enables you to allocate your marketing budget more efficiently, ensuring that every dollar you spend is going towards tactics that generate the most revenue.
- Keeps the pulse on your audience. ROAS isn't just about understanding your ads; it's also about understanding your customers. A high ROAS for a particular campaign can give you insights into what kinds of messaging and offers resonate with your audience, helping you to better tailor future campaigns to their needs and preferences.
I'd go so far as to say ROAS isn't just a number—it's a crucial indicator of your marketing efforts' success and a guide for future strategies. Therefore, it deserves your close attention.
What is the ROAS formula?
The best thing about ROAS is how easy it is to grasp. ROAS is simply the amount you earn on every dollar you spend on advertising.
Examples of ROAS calculations
Now, let's look at an example to illustrate how this works.
Suppose you run an online shoe store, and you've recently spent $1,000 on a Facebook ad campaign. Over the course of the campaign, you track the sales and find that it has generated $5,000 in revenue.
To calculate the ROAS for this campaign, you would divide the revenue by the cost:
ROAS = $5,000 (Revenue) / $1,000 (Amount Spent) = 5
So, the ROAS of this campaign is 5. That means for every dollar you spent on this ad campaign, you earned five dollars in return.
Unfortunately, given the natural volatility of the digital marketing world, sweeping changes can creep up seemingly overnight. You might even find that your ROAS has been slowly slipping over time without even knowing it.
As we mentioned before, that’s a dangerous situation to be in. Therefore, you can use tools like the Madgicx One-Click Report to monitor your ROAS across all your ad networks in a snap.
With One-Click Report, you can view metrics like ROAS, ad spend, cost per purchase, and more across Meta, Google Ads, Shopify, and TikTok.
Not only do these dashboards come pre-built with your Madgicx account, but they’re also completely customizable—just drag and drop your preferred metrics into your report, and you’re done. You can also share the reports with coworkers or clients without them having to have a Madgicx account.
The cherry on top? All of this data is available starting at $29/month.
/end self-promotion bot 🤖
How to calculate break-even ROAS?
While knowing what your ROAS is is a great first step, you also need to be able to know your break-even ROAS.
Your break-even ROAS is the ROAS you need to remain profitable, given your profit margin. Therefore, your beak-even ROAS can be calculated as 1 divided by your profit margin.
If our profit margin is 59%, we would write that as 1/(59/100), or 1/.59. This would give us a break-even ROAS of 1.7, meaning that we need to achieve more than a 1.7 ROAS to generate a profit.
Since it’s a bit more complicated than just looking at the money spent on ads/money made in return, we’ve made a handy video here that explains the process in depth:
You can also use our free Facebook Ad Cost Calculator to find your breakeven ROAS if you’d rather save yourself a few clicks.
What is the difference between ROAS and ROI?
Both ROAS and ROI are used to gauge effectiveness and profitability but in different ways.
ROAS is a more specific metric that measures the gross revenue generated for every dollar spent on advertising. It's strictly for advertising spend and revenue directly from that advertising spend.
ROI, on the other hand, is a broader measure used to evaluate the efficiency of an investment or to compare the efficiency of several different investments, measuring the net profit for every dollar spent.
In this case, ‘investment’ could include not only the cost of advertising but also other costs, such as the cost of goods sold, overhead costs, etc.
In other words, ROI takes into account the overall return of the business effort, while ROAS focuses on the return specifically from advertising spend.
What is a good ROAS?
Generally, a good ROAS would be at least above your break-even ROAS. At the very least, you want to make sure that you're never below those figures. Otherwise, you venture into a situation where your ads are costing as much to run as they are earning you profit, and you'll never be able to do more than break even (or worse).
A great idea is to check out industry benchmarks on ROAS to get a sense of where you should be aiming based on your niche.
It’s also important to note that you might be able to afford a lower ROAS on your acquisition campaigns as long as your retargeting and retention campaigns drive a higher ROAS as a result.
Factors that influence your ROAS
It would almost be easier to list what doesn’t influence ROAS in the advertising world.
That being said, here are some of the biggest factors from a general marketing standpoint that can make or break your ROAS.
Ad creative and copy. A scammy-looking ad isn’t going to persuade anyone to give out their credit card details. The more compelling and engaging your images, videos, and copy are, the more likely they are to lead to conversions (and a better ROAS).
Targeting. This is one of the big ones. The accuracy of your targeting can significantly influence your ROAS. If you’re trying to sell golf clubs to avid soccer fans, chances are no matter how good your pitch is, they just won’t convert.
Bidding strategy. When running ads on any channel, you’re always in a bidding war with your competitors—and having a solid bidding strategy can help to ensure you find a place on your audience’s feed. (We also have a fantastic guide about how to outbid your Facebook competitors if you need it.)
Ad placement. Bus stop bench ads in a small town and billboards in Times Square will have a huge delta in impressions. While that’s a pretty big leap, the world of ad placements might not be as far off as you think. Different placements (e.g., Facebook news feed, Instagram stories, Facebook marketplace) have different costs and may yield different results. Choosing the right placements for your goals and audience can improve your ROAS.
How to improve your ROAS
Now that you can calculate both your ROAS and break-even ROAS, it’s time to hone in on ways to improve it if you find your results are lackluster.
#1. Improve your ad creative and copy
As we said above, a scammy ad isn’t going to drive conversions, no matter how much effort you put into optimizing the audience or bidding strategies. If you can’t decide if your ad passes the ‘good’ test, ask yourself:
- Does this ad speak to my audience by using the same terms and language they do?
- Does this ad adhere to my brand identity guidelines (uses the same color palette, fonts, standard logo, etc.)?
- Is this ad well-designed (fits the right image sizes, is high-resolution, etc.)?
- Does this ad clearly communicate the offer at hand?
- Does this ad tell the viewer how to take the next step?
If you can’t answer an enthusiastic yes to all of the above, your ad needs a redesign stat.
P.S. We have several articles on all things ad design, ranging from Facebook ad examples to give you design inspo, copywriting hacks, and strategies on all things video.
#2. Build out your marketing funnel
Logical people don’t ask their blind date to marry them in the first 5 minutes. Likewise, you shouldn’t expect your audience to immediately buy from you as soon as they learn that your product exists.
In fact, if you Google ‘how many touchpoints it takes before a sale,’ you’ll see a plethora of articles that say that anywhere from 3-50 touchpoints can happen before a single sale. This means that if you expect an ad going to a cold audience to have a huge ROAS, you’re probably going to be disappointed.
Instead, you need to create a full marketing funnel that takes your audience from strangers to happy customers by using graphics, copy, and language that speak to where they are in the customer journey.
#3. Revisit the user experience
If you believe the other steps are working fine, you might also want to make sure your user experience is as seamless as it can be. If your ad does the hard work of convincing them to buy, you don’t want the checkout experience to prevent the sale from happening in the first place.
To make the process as easy as possible, make sure to:
- Reduce the number of steps required to complete a purchase. Use a one-page checkout if possible.
- Don't force users to create an account; offer a guest checkout option for those who want a quicker transaction.
- Include a variety of payment methods, such as credit/debit cards, PayPal, Apple Pay, etc., to cater to different customer preferences.
- Make sure that the checkout page is fully responsive and looks good on mobile devices.
#4. Continually tweak and improve your campaigns
Since improving your ROAS means investigating and tweaking nearly every part of your campaign, it may feel like an overwhelming task.
Luckily for you, there’s a tool that touches all of the big factors we mentioned above in one place: Madgicx. ;)
With Madgicx, you get access to tools like:
AI Marketer
If you want to combine the power of AI with your media buying process, AI Marketer is your new best friend.
AI Marketer will surface the factors that are having a huge impact on your ROAS and allow you to implement its recommendation with the click of a button. (Seriously)
And unlike other “magic” AI companies, we’ll show you exactly why we’re recommending this improvement and the exact things that are being changed—no more black box secret algorithms.
And if you want to do something about your ROAS right this second, you’ll be happy to know that you can try these features for $0 with your 7-day free trial of Madgicx.
Conclusion: The value of ROAS for businesses
As you’ve learned today, the value of ROAS in marketing cannot be underestimated. It's a crucial metric that offers deep insights into the effectiveness of advertising campaigns, helping businesses understand the direct return on their ad spend.
By regularly monitoring and optimizing for ROAS, marketers can make data-driven decisions, maximize their budget, and ultimately drive profitable growth.
While it doesn't paint the full picture of business profitability on its own, it remains an invaluable tool in the marketer's arsenal for evaluating ad performance and guiding strategic decision-making.
