Return on Advertising Spend

What is ROAS?

Return on Advertising Spend or ROAS in short is a popular metric used in the world of advertising. It answers a very simple marketing question - if I were to invest X amount of money into a certain marketing channel, what will I get in return from it?

In other words, it measures how much a business stands to earn in revenue for every dollar that it spends on marketing or advertising. 

In many ways, ROAS is similar to another widely used metric in marketing called Return on Investment. While ROI focuses on the effectiveness of spends, on the whole, ROAS is mostly used to measure the effectiveness of specific campaigns - like ads and other marketing initiatives.

ROAS lets advertisers know if the marketing channels that they have invested in are worth pursuing or not. It can also be used to compare one marketing campaign with another and tells you which one is doing a better job at driving in those dollars. 

Let’s say your ROAS is 4:1, it simply means that you are earning $4 for every $1 spent on the campaign. That’s not bad at all, right?

How to calculate ROAS for your online store?

Now if you’re wondering whether the ad campaigns for your online store are really worth the money, then it’s time you take a look at your Return on Ad spends.

The equation for this is pretty simple. All you need to do is divide the revenue earned from an ad campaign by the total cost incurred on it.

In this case, here’s how you can calculate ROAS:

ROAS = Revenue / Total cost of advertising 

For example, an ecommerce business spends $ 3000 on an online advertising campaign and the campaign generates  $15,000 in revenue.

Your Return on Ad spend in this case is 15,000/ 3000 = 5:1.

While calculating the ROAS, don’t miss out on taking into account all of your ad costs.This includes:

1. The fees and commissions paid to vendors and designers who have helped with your campaign.

2. The salaries of  marketing staff who have worked on the campaign

3. Not to forget the commissions you’ve paid out or the transactional fees you may have incurred.

If you miss out on adding these expenses to the total cost, the ROAS you calculate will be inaccurate. This could lead to overspending on a campaign that isn’t doing well or canceling out on one that is making steady progress.

What is a good ROAS for your online venture? If the Return on Ad spend is under 3:1, re-evaluate your marketing, in all likelihood you’re losing money.

With a 4:1 ROAS ratio, you are on the right track - tweaking a few campaigns could do you some good.

If the ROAS is 5:1 or more - great going, things are shaping up pretty good for you and your marketing efforts are yielding the best results.

Why is ROAS important for your ecommerce business?

Now that we know what Return on Ad spend is and how it’s calculated, let’s look at why this is an important metric that ecommerce marketers need to be tracking. 

Does ROAS really matter? You bet it does!

While there are other metrics like the click-through rate or the conversion rate that you could track, you will be missing out on the big picture and critical information on your paid campaigns if the ROAS is ignored.

Here is the deal - at the end of the day advertising is all about earning revenue, not just about creating traffic or conversions.

ROAS gives an in-depth understanding of what ads or campaigns are working for you. This metric charts out what strategies you need to keep alive and what you must certainly give up.

How to improve ROAS for your ecommerce business?

To stay on top of the game and attract new customers to your online store, you need to make the most of all the right marketing channels. 

Here are a few steps to take to improve the Return on Ad spends:

1. Re-check its accuracy: You can end up pausing a competitive campaign for no apparent reason if the ROAS is inaccurate. 

2. Reduce your ad costs: Lowering your ad cost will certainly improve your ROAS.

3. Increase the revenue generated from Ads: If you have tried everything you can to reduce costs, it’s time to look at improving revenues generated by ads. You can do so by optimizing landing pages, having a strong CTA, and by using the right keywords.

Now that you know how to keep your online store’s ROAS in check, you may also want to ensure that your customers are kept happy with great customer support. DelightChat’s customer support tool has got everything you need to offer excellent customer service.

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