Definition: ROAS [Return On Ad Spend]


What is ROAS?

Return On Ad Spend (ROAS) is a metric used in online advertising to calculate how much revenue you earn in relation to the amount you spend on ads.

It is a form of ROI that only takes into account money that is directly spent on ads. ROAS answers the question – if I spend $1 more on these ads, how much can I expect to get back in return?

 

Why Use ROAS?

Return On Ad Spend is a useful metric to:

  • compare the profitability of different ads, ad campaigns, or ad platforms
  • plan how much you will get back if you spend more money on a set of ads
  • test if a freelancer or agency are making the most of your ad spend
  • report on to key stakeholders about online advertising as it is easily understandable

ROAS is even arguably a better measure of success than Conversion Rate. This is because it takes into account the amount earned from ads and not just conversions. This is especially important if you are selling multiple products through one set of ads.

To put it another way: a high conversion rate means your ads are doing well at generating conversions (regardless of their value). On the other hand, a high ROAS means your ads are doing well at generating money.

 

ROAS Definition

ROAS is an acronym that stands for Return on Ad Spend. It is a high-level measure of the efficiency of an advertising campaign.  This is the amount you get back from an ad (or ad campaign, or ad platform) divided by the amount you spend on that ad (or ad campaign, or ad platform).

Please note: ‘Return’ does not mean profit. If you sell an item for £5 then your return for the purposes of this metric is £5. This is regardless of how much the item cost you to procure or produce.

Similarly, ‘Ad Spend’ in this metric only takes into account money spent directly on the ads. This figure does not take into account the cost of creating, running, or tracking ads. The ad spend is the budget that is spent within the ad platform only (such as Google Ads, or Twitter Ads).

 

ROAS Formula

The Return on Ad Spend equation is:

Return On Ad Spend Equation or ROAS FormulaClick to enlarge

ROAS = Amount Gained From Ads ÷ Amount Spent On Ads

[If you would like to calculate the ROAS of your campaigns, you can use our helpful Return On Ad Spend calculator.]

 

Notes:

  • Return on Ad Spend is sometimes expressed as a number (such as in Facebook Ads). In this case you a value of 1.2 (for example) is equivalent to 120% using the above equation.
  • Return on Ad Spend can also be expressed as a ratio of ad spend to ad gain (eg 3:7). In this case, you can simply input the related figures in the above equation in order to work out a more comparable figure.

 

Average ROAS

According to an often-quoted (but impossible to find) study by Nielsen, the overall average Return on Ad Spend is 2.87 (or 287%). This means that for every $1 you spend, you receive $2.87 in return. This broad average is only useful as a general benchmark.

There was a follow-up article from Nielsen in 2016 which broke the stats down a bit further. This broke down stats by industry and channel (not digital channels, unfortunately) and showed a range of ROAS levels from 2-4 (or 200% to 400% if you prefer).

If you are looking for a benchmark, somewhere between doubling and quadrupling your money is good (but not remarkable).

 

ROAS Example

If I spent £10,000 on ads and earned back (in sales) £200,000, then my ROAS would be 2000%. This means that if I spent £1 more, I could expect to earn another £20 (as 2000% of £1 is £20).

A ROAS of less than 100% means that you are getting less back than you are putting in. For example, if you spent $200,000 on ads and received £10,000 in revenue then you would have a ROAS of 5%. This means that for every $1 you spend you could expect to only receive $0.05 in revenue.

Remember: This metric only takes into account ad spend and no other money spent on marketing. Therefore you should aim for a ROAS far above 100% to ensure you cover your costs. In fact, to really make sure you are covering costs, you should calculate your ROI instead.

 

Top Tip

The ROAS you record is very dependent on the type of attribution you are using.

For example, if you use ‘last-click’ attribution, then you are strongly favouring ads that appear at the bottom of the funnel (such as search ads).

Imagine someone clicks on a display ad on Monday, a social media ad (for the same thing) on Tuesday, and a paid search ad (for the same thing) on Wednesday. If you were using last-click attribution, then only the Paid Search ad would count a conversion. This would mean the paid search would see a good ROAS, while the other two channels would not.

To counter this problem, you should consider some type of multi-channel attribution such as time-decay.

 

7 Key Points About ROAS

  1. Return on Ad Spend answers the question: “How much will I get back for every $1 I spend on these specific ads?”
  2. ROI is useful to measure if a whole marketing campaign is profitable. ROAS is useful to measure if the individual parts of the campaign are profitable.
  3. ROAS is usually shown as a percentage, but can also be a number or ratio. When you are earning more than you are spending:
    – As a percentage: ROAS > 100%
    – As a number: ROAS > 1
    – As a ratio: the left number > the right number
  4. Return On Ad Spend is useful to compare ad campaigns and platforms and to make sure that whoever is running your ads knows what they are doing.
  5. According to a 2015 Study by Nielson, the average ROAS across all industries was 287% (eg you get £2.87 for every £1 spent). While it is too broad an average to be very useful, it’s also a reasonably low benchmark to aim to beat.
  6. For ROAS to be populated on ad platforms, the ad platform needs to know how much revenue you are making from their ads. To do this simply add their tracking code to your site.
  7. If you have a ROAS below 100% (and your goal is revenue), then move the budget elsewhere. A campaign generally needs a week to get going but after that, you should cut the bits that aren’t working.

 

Other names for ROAS (synonyms)

ROAS is called “Conv. Value / Cost” in Google Ads.

 

Not to be confused with

ROI. ROAS and ROI are roughly the same, but ROI takes into account all expenditure, while ROAS is only about ad spend.

 

Summary

ROAS Definition

 

Glossary Index