Return on advertising spend (ROAS) is a metric that estimates the revenue received from every dollar a company spends on advertising. It allows companies to assess the effectiveness of advertising campaigns and the income they earn from them.
In this article, we’ll unveil the importance of ROAS and explore its formula. We’ll also uncover 4 ways to increase return on advertising spend.
Why is a return on advertising spend important?
ROAS is one of the essential metrics for businesses that help evaluate the effectiveness of specific ads, advertising campaigns, or platforms. While ROI enables entrepreneurs to estimate the profit they obtain after all expenses, ROAS provides brands with an understanding of the revenue each ad brings. After calculating the return on advertising spend, marketers can identify the performance of each ad or campaign and figure out how profitable they are. Once they find it out, they can take measures and improve their strategy and ads.
Before companies launch advertising campaigns, they need to define the minimum revenue they should obtain from them. This way, marketers can reveal whether they succeed in reaching their main target. Usually, brands hope to receive a minimum of $4 for every dollar they spend on an ad. Yet the majority of businesses still seek to generate bigger revenue. Along with other major metrics, return on advertising spend provides business owners with a clear picture of their companies and the measures they need to improve to attain their revenue goals.
Now that you know the importance, it’s time to explore a formula and calculate ROAS for your business.
How to calculate return on advertising spend?
You can easily estimate a return on advertising spend metric with the formula provided below.
Return on Advertising Spend = Revenue Attributable to Ads / Cost of Ads.
We’ll have an example to make sure that you understand how to use this formula for your business purpose. Let’s say that you have a startup and decide to invest in an advertising campaign. The campaign costs you $300 and brings you $1500. It’s time to calculate ROAS for this situation.
ROAS = $1500 / $300 = $5.
The ratio is 5:1, which indicates that the result of your advertising campaign is great and gives you good revenue. So, for every dollar spent on this campaign, your company gets $5.
There are two ways to estimate your ROAS. Some marketers prefer to calculate the measure based on ad costs, while others find it useful to cover additional advertising expenses. This allows them to have a clear picture of the campaign’s performance and its profitability. Some companies assess both to have accurate indicators.
The formula is clear now, so let’s jump into some tactics to improve your return on advertising spend.
4 ways to increase your return on advertising spend
As a marketer, you want to achieve the best revenue goals and do your best to make it possible. We’ve got some tips for you to generate higher ROAS. So let’s dive in.
- Spend less on your advertising campaign. You can boost your return on advertising spend by reducing the ad cost in different ways. Try to change your bidding strategy. You can consider two different methods: manual and automated bidding. If you place an ad in a lower position in search results on Google, you can save your money. Besides, it’s critically important to target the right audience segments. For this purpose, you need to identify your ideal customers, their location, job, age, gender, hobby, etc. When you reach your target audience, you avoid spending money on people who aren’t interested in your product.
- Ensure you have shopping ads. Since more and more people use mobile devices for shopping, you should consider product listing ads. Optimize them and target your audience segments. Customers will instantly notice your product and buy it if it meets their requirements.
- Improve customer lifetime value. Loyal customers are very important for your business since they regularly bring profit. You can boost their customer lifetime value and accordingly increase ROAS. You can do it in several ways: implement upselling, send email campaigns to keep customers updated on new releases, discounts, and special offers, and create loyalty programs to encourage purchases and referrals.
Congrats, now you know how to calculate and increase return on advertising spend. Make use of the techniques above to boost your profits.
Last Updated: 22.03.2023
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