How to Calculate ROAS and What You Can Do to Optimize Your Campaigns

March 3, 2022

ROAS, Return on ad spending, digital ads return on ad spend roas, How to Calculate ROAS and What You Can Do to Optimize Your Campaigns, how to calculate roas

What is Return on Ad Spending? ROAS

Companies spend over 150 billion dollars marketing their products and services every year through ad channels including Google, Amazon and other platforms.

ROAS, also known as return on ad spending is the term used as the amount of money earned for every dollar spent on an ad campaign. 

Understanding your return on ad spending is the first step in calculating how your ad spending efforts affect revenue generated from your ads for your e-commerce store and your product listings on third party platforms like Amazon, Walmart or other new eCommerce platforms such as Trustables.

Why Does Return on Ad Spending Matter?

Return on ad spending plays a fundamental role by helping answer how much money will your business earn on a marketing campaign and if it doesn’t achieve the return you need, you need an experienced e-commerce marketing partner to help you optimize your products and marketing campaigns.

Whether you advertise on Google, Amazon or another platform, fees for advertising go beyond the costs of the ads themselves. When you run an ad campaign, these are additional costs and considerations that affect your bottom line.

Wages & Vendor Costs During a Campaign 

These are generally the largest additional costs that are associated with advertising.  

Whether you have your own team that creates, launches and maintains your ad campaigns or you hire a third party advertising service to run your ads, the wages and additional fees associated with vendors, partners and other relevant parties must be included in your advertising costs to to get your true picture of your return on ad spending and ensure campaigns provide a profit.

Referral & Affiliate Costs 

If you pay affiliates or referrers to promote your products, then you must accurately get the true cost of these payments including commission percentage as well as any network or transaction fees associated with these payments.

Cost Per Click & Cost Per Impression

Cost Per Click (CPC), Cost Per Impression (CPI) and the total number of clicks are important metrics to consider when running advertising campaigns.  

Since the cost to advertise keywords are constantly changing, businesses must actively monitor their campaigns to ensure effectiveness and are on course to achieve their desired ROAS ratio.

How Do You Calculate ROAS?

You can calculate your return on ad spending by using the standard formula that calculates ROAS as the revenue earned from ad campaigns after the cost of the ads themselves are taken into account.

Calculating ROAS

ROAS equals the gross revenue from an ad campaign and to calculate it by dividing the profits from an ad campaign by the initial amount invested.

ROAS Example Calculation

If a company spends $3,000 on an ad campaign online in a month and the revenue generated equals $12,000; then the return on ad spending ratio would equal 4 to 1 or 400% because $12,000 is divided by $3,000 dollars to equal 4 dollars earned for every dollar spent on advertising before expenses.

What is Considered a Good Return on Advertising Spending Ratio?

While there’s no definitive right or wrong answer to a good ROAS ratio due to it being influenced by operating expenses, profitability as well as the popularity of the brand, 4:1, or four dollars earned for every one dollar spent is typically considered the ‘base’ return on ad spending. 

New companies, startups and businesses paper thin margins typically must achieve a higher ratio to cover additional startup costs and expenses in the magnitude of 10:1, while other businesses have the potential to make a profit with a ratio as low as 2:1.

What is the Difference Between ROI and ROAS

When discussing return on ad spending, it’s natural to ask how it’s different from ROI.

While both Return on Ad Spending and Return on on Investment deal with monetary returns, return on investment, or ROI allows businesses to calculate the total return on investment after business costs which include wages, procurement, fixed costs including real estate and applicable taxes.

ROI calculates how much your company makes from advertising (or another channel) after expenses, which includes operational costs, turnover, and more. In comparison, ROAS determines how much your business earns (on average) from advertising only.

Since they measure different aspects of your campaign, ROAS and ROI also use different formulas. While ROAS calculates the average total return on the dollars spent on an ad campaign, ROI on the other hand calculates a businesses net profit after expenses are taken into account.

How to Improve Your Return On Ad Spending

Even if a business is achieving a healthy return on investment, there are additional methods that can be used to further optimize your company’s advertising efforts including.

  • Optimizing your website & landing pages
  • Keyword research
  • Utilize branding campaigns
  • Using negative keywords in your PPC campaigns

Optimizing Landing Pages, Content & Speed

Your business has 5 seconds for a potential customer to decide whether they want to continue looking at your site once they land there and if your website loads slowly due to unnecessary plugins, un-optimized images, videos or poor coding, your chances of losing a potential sale increase dramatically. 

__LINK__WEB__DESIGN

Having ads directed to your website that is poorly designed, hard to use or worse, has spelling errors significantly can lower a businesses trust rating with potential customers. 

When you run ads and you send potential customers to your campaign’s landing page, you want to present a fast loading and easy to use page  that promotes your products and helps to promote trust in your brand.

The goal is to make the buying process to be as easy as possible for potential customers which means having an experienced website team that directly works with your marketing team to create a page experience that is not only optimized but provides a rich experience with content that builds trust but also gives customers a seamless purchasing process.

Utilizing Branding Ad Campaigns

Whether your business is relatively new or has been in operation for a while doesn’t mean that potential customers know who you are, your business exists or even what products you sell.

Keyword Research 

Before running ad campaigns you want to know exactly which keyword that customers are searching for that directly assimilates your products and the customer’s search intent.  

This is the primary reason why it’s important to have a dedicated marketing team that directly coordinates with your website development team to shape the online buying experience and utilize appropriate keywords not only for your site, but your product listings and ad campaigns

Utilizing Branding Campaigns

Branded ad campaigns are a great way to use Pay Per Click (PPC) campaigns to increase brand awareness by targeting your businesses name.  These campaigns have the potential to provide a great return by not only increasing the visibility of your brand but also the products you sell.

Using Negative Keywords in Your PPC Campaigns

When you utilize negative keywords, you remove your ads from appearing in searches that have those keywords.

What Are Negative Keywords?

Negative keywords are keywords that can be entered into a PPC campaign that prevents that word from triggering the appearance of your ad, which is also known as a negative match.

An example of this would be adding the word free as a negative keyword in your campaign and Google Ads won’t show your ads on any search that includes the word free.

Creating a negative keyword also means that your ad is less likely to appear on a site when your negative keywords match the site’s content.

Summary 

If your business runs ads, they must generate the awareness, purchases and revenue that your business needs to reach a positive ratio on your ad spending. 

While new companies have more to consider when creating their ad campaigns all of the strategies above should be taken into consideration by every business to maximize your return on advertising spending and your profit ratio. 

When your business runs ads that fail to generate the profits you need it puts your business in a compromising and a more competitive position with other businesses that sell products related to your niche that leads to even more lost revenue opportunities.

All sectors of your business from web development, marketing, advertising and distribution must work together cohesively to create and implement a comprehensive strategy for your brand and ad campaigns that put your business on a path of profitability.

Professional Advertising Management Services

CPG.IO offers professional advertising management, web design, marketing and distribution services that give your business an omni-channel, one-stop shop for all of your ecommerce business needs.

Contact us today for a free consultation and demonstration to learn can help optimize your ad campaigns to increase your return on advertising spending.

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