Understanding Return On Advertising Spend (ROAS)

There are hundreds of metrics marketers can use to evaluate how successful a campaign is. As different metrics provide different insights, it is important to identify the most suitable one for every strategy. Marketing metrics allow us to track performance quantitatively and are an essential measurement tool for determining a campaign’s effectiveness. In this blog, let us take you through what you need to know about one of the most widely used metrics, Return On Advertising Spend (ROAS).

What Is Return On Advertising Spend (ROAS)

Return On Advertising Spend (ROAS) is a marketing metric that measures how effective advertising campaigns are, based on the revenue earned for every dollar spent on advertising. Knowing and understanding ROAS can immensely benefit businesses by allowing them to determine how successful their campaigns are and ways to further improve advertising efforts. 

How to Calculate ROAS 

ROAS can be calculated for various advertising campaigns. This ranges from a single project, to monthly initiatives. To calculate ROAS, simply divide the revenue of your ad campaign by the cost of that campaign. For instance, if you spend $2,000 on ads, and your revenue is $6,000, your ROAS can be determined by dividing $6,000 by $2,000. This will result in a ratio of 3:1 or 300%. In general, a more effective campaign is associated with a larger ROAS. This also means that you have earned a higher revenue for every dollar spent on advertising. 

What Is A Good ROAS

There is no “right” answer to what ROAS is considered to be good. A good ROAS is dependent on several factors, such as the health of your business and advertising objectives. For example, if your business is looking to increase brand awareness, having a low ROAS will be considered acceptable as consumer awareness does not guarantee conversions and revenues. A common benchmark for ROAS is 4:1. This means that for every dollar spent on advertising, your business generates $4 in revenue. Furthermore, a good ROAS differs across industries. It is important for you to establish a suitable ROAS for your business and industry before starting an ad campaign. For some industries, a high ROAS is deemed more desirable because of the low customer lifetime value (CLV). Intuitively, a higher ROAS equates to more revenue. This compensates for the lower revenue the business can earn from the customer. 

Importance of Understanding ROAS

It is essential for businesses to evaluate the efficacy and performance of their advertising campaigns quantitatively. By calculating ROAS, the insights acquired from this approach can help set future marketing strategies and overall directions. Companies can be more informed about where they should invest their funding so that they can achieve more. For example, businesses can track the ROAS of multiple campaigns and look at ROAS calculations for each of them. In doing so, they can determine which have lower and higher ROAS and adopt the methods to optimise advertising efforts. For instance, businesses can respond accordingly to these insights by allocating a higher budget to campaigns that have high ROAS, and reduce their spendings on campaigns with low ROAS. All in all, companies can make informed decisions and become more efficient when they keep tabs on ROAS.

Comparing ROAS and ROI

Do you know how ROAS is different from ROI and when each metric should be used? While ROAS is used to measure the total revenue generated per advertising dollar spent, Return on investment (ROI) refers to the profit generated by the ads relative to the costs of the ads. ROAS measures the gross revenue generated for every dollar spent on advertising. ROI accounts for the amount earned after expenses.

In the calculation of ROI, both online and offline costs and all operating costs are considered. The net profit is calculated by taking your total revenue gained from your investment and subtracting the investment itself and the taxes from this amount. In comparison, ROAS calculation only accounts for your ad spending cost and you need to do some calculations to find the net profit from your total investment. This is because the calculation does not include operating costs involved in supporting your business.

With that being said, both of these metrics tend to be used interchangeably by many. In fact, they are important metrics with several key differences. ROI can be thought of as a macro view of the ad campaign as it contributes to the profitability of a business. ROAS, on the other hand, is a micro view of the ad campaign performance. More often than not, ROI and ROAS are used together to present you with a more complete picture of the efficacy and profitability of your ad campaigns than either could alone.

How To Maximise ROAS

Now that you have a better idea of what ROAS is and why it is important for marketing campaigns, why not take a step further to deepen your understanding by signing up for our beginner-friendly Digital Marketing course! Learn all you need to know about digital marketing and how to maximise your ROAS from our experts and instructors while gaining an accredited certificate in Singapore. 

Besides digital marketing, Vertical Institute also offers UX Design and Data Analytics courses in Singapore. These are some tech skills that are highly in-demand today and will be helpful for your digital marketing career.

About Vertical Institute

Vertical Institute prepares individuals for the jobs of tomorrow. We specialise in teaching in-demand skills, building the next generation of changemakers and inventors through our world-class tech courses and certifications. 

Singaporeans and PRs can receive up to 70% IBF Funding off their course fees with Vertical Institute. The remaining fees can be claimable with SkillsFuture Credits or NTUC UTAP Funding.