By ROAS, or return on ad spend, can range from 1.55 to 9.10 on average depending on the channel (First Page Sage). Without context, that statement is probably confusing. Are those figures dollars? Percentages? What do they even mean and why do they matter?
Establish yourself as the trusted local expert in digital advertising. Download "White label: Mastering Google and Facebook advertising for local businesses" right now.
These are questions any agency offering digital advertising services must be able to answer. Keep reading to better understand ROAS and get some practical tips on how to compute ROAS and discuss it with your clients.
Understanding ROAS
Agency teams must understand a variety of return on investment metrics, including ROAS. This lets them communicate clearly with clients and demonstrate the value and effectiveness of their services.
What is return on ad spend (ROAS)?
ROAS measures how much revenue is generated for every dollar you spend on advertising. Keeping track of ROAS can help you understand the effectiveness of your digital advertising efforts, since this metric is technically a specific type of return on investment (ROI) metric.
You can measure ROAS as a whole—the total return on all ad spending for a client, and you can also measure it for specific campaigns or platforms, such as the ROAS for Facebook ads.
Why is it important to track ROAS?
Tracking ROAS lets you:
- Understand whether ads are performing
- Compare ad performance across campaigns or platforms to support continuous improvement decisions
- Demonstrate the financial value of your services to clients
How does ROAS bring value to you and your clients?
When you understand the ROAS formula and can accurately track this metric, you and your clients can experience the following benefits:
- Baked in advertising intelligence. Accurate ROAS calculations require a lot of data, including strong marketing attribution. These insights can help you make marketing and ad decisions that support business goals for your client.
- Better A/B testing and comparison. ROAS metrics provide an objective way to compare the performance of various efforts, making it easy to test different big-picture approaches and choose between them.
- Better communication. When you and your client understand the measure of success and what outcome you’re shooting for, you can better communicate and collaborate on that success.
How to calculate ROAS
The ROAS formula itself is pretty easy to understand and remember. It involves dividing the revenue generated in relation to ad campaigns by the total cost of those campaigns. Specifically:
Return on ad spend = Ad-Related Revenue / Total Ad Spend
You can find return on ad spend calculator options online that do the math of this formula for you. However, once you get to the basic formula, you can easily do that math yourself too.
Getting to the variables for the ROAS formula
The bigger challenge is in arriving at accurate variables to feed into the formula for ROAS. The first number—total ad spend—is fairly easy. You should obviously track the amount you spend on ads for any campaign, client, or effort, so you likely have that figure easily available.
Ad-related revenue, which is also called conversion revenue, can be more difficult to calculate. To arrive at this figure, you must accurately attribute conversions and revenue to specific ad campaigns.
This involves leveraging comprehensive marketing attribution—an effort that takes a lot of collaboration between you and your client. If anyone within the process fails to consistently attend to details or sets up attribution incorrectly, your ROAS calculation won’t be correct. Integrating automation to capture marketing attribution and other data as much as possible is often the best way to support consistent accuracy for these figures.
Use cases for reporting on ROAS
Once you know how to compute ROAS and understand that it can take a bit of work, you may want to know when to push for this number. Here are a few common use cases for reporting ROAS within your agency and to your clients.
Budget allocation
When you report accurate ROAS to clients, they can better allocate advertising budgets, making decisions to funnel more funds into efforts that perform better. They can also consider whether low-performing campaigns have a purpose other than driving revenue and make the educated decision to continue funding those efforts despite a lower ROAS if desired.
Whether you’re working within the bounds of a PPC reseller program or managing ads for your own agency, budget allocation is critical. It helps businesses keep ad budgets within appropriate control while maximizing returns.
Channel comparison
ROAS provides a fast way for businesses to evaluate the performance of advertising on various channels. With so many platforms available, clients may be tempted to invest in Facebook, Instagram, Twitter, YouTube, Bing, and Google Ads management—not to mention many others. ROAS helps them compare performance and choose the platforms that work best.
Why not launch ads everywhere for more exposure?
While multichannel marketing is extremely effective—as you likely know if you engage in both SEO and PPC management—businesses can spread themselves and their ad budgets too thin if they try to show up everywhere. Small and midsize businesses, especially, may need to monitor ad spending and do the most they can with the resources they have. Peppering ads across the entire landscape of the World Wide Web doesn’t achieve that goal.
It’s also not super effective for companies to do this even if they have the resources to attempt it. Businesses of all sizes—with the help of their marketing agencies—should work to discover the platforms where ads drive the most connection and conversions. For example, a business targeting older adults with a medical app would probably do better with Facebook ads than with Snapchat or TikTok ads—and ROAS can quickly confirm whether that’s true.
Ad creative analysis
Whether you’re using white-label PPC services or collaborating closely with clients to create ads together, ROAS can support continuous improvement in ad elements. You can run ads with different creative elements and check the ROAS of each ad set to understand what is more effective.
Here are some elements you can use ROAS to test and verify:
- Visuals, such as images
- Ad headlines
- Ad copy, including which phrases you use or what order information is presented in
- The specific offer or the way an offer is presented
- Calls to action
Using A/B testing with ROAS as a performance indicator, you can continuously tweak ads to drive better performance and more revenue.
Audience segmentation
Digging into ROAS figures, you can better understand how ad campaigns are performing across various audience segments. This lets clients make educated decisions about how to best segment their target audience and how to approach ads for each segment.
ROAS also helps clients identify high-value audience segments that seem to drive more revenue than others. This information can help clients create important new marketing and ad campaigns but also provides feedback that might be useful in future product development or the creation of customer loyalty programs.
Examples of how ROAS helps with audience segmentation
Here are a few basic examples of how ROAS can help your clients make informed decisions about audience segmenting:
- Demographics. Clients might segment audiences by factors such as age, gender, geographic location, familial status, or income level. ROAS can help determine when such segmentation is helpful. For example, if you see that the ROAS for ads is much higher for people aged 40 and up than it is for younger people, it can indicate a valuable segmentation for the client.
- Interests. Interests include hobbies, careers, religions, and other lifestyle choices. You might notice that ROAS indicates that a certain ad campaign tends to perform best with career-minded individuals, for example.
- Behaviors. Behaviors refer to what people do online. Perhaps an ad campaign works well for people who play games online but doesn’t seem to connect with people who only use the internet to check email and social media.
Long-term performance tracking
Because ROAS is a subjective, trackable, and consistent measure of ad success—as long as it’s recorded accurately—it allows businesses to track advertising performance over time. Even as a business scales, ROAS tells a consistent story because it divides revenue by ad spend.
For example, a business might start out spending $100 monthly on ads. Five years later, it’s grown and can afford to spend $5,000 monthly. You would expect that its revenue has also scaled, so ROAS doesn’t necessarily go up or down simply because the spend does. Your clients can, therefore, compare ROAS from last year to ROAS this year to determine whether ad performance has increased.
ROI calculations
ROAS figures can be an important part of determining the overall return on investment of advertising and marketing efforts. You can use this figure alongside other important business metrics, such as the cost of goods sold, to help clients understand whether their ad budgets are appropriate and what they are getting in return for that spend.
Tips for presenting your ROAS findings to clients
As an agency, the most accurate ROAS calculation you can possibly arrive at does little good if you’re not presenting the metric to clients in a way they understand. Remember that many of your clients aren’t digital marketing experts, and they likely aren’t familiar with the types of metrics and analyses that go into making strong PPC ad decisions. Start off by educating clients about ROAS and other important considerations.
Next, think about ways to discuss ROAS that add value for the client. That can range from using ROAS to help clients make choices that improve their online advertising efforts to using ROAS as a way to ensure clients understand the effectiveness of the services you provide.
Use visual data tools
Clients might become overwhelmed or confused when presented with columns full of numbers and a lot of marketing speak—even if they are fairly well-versed in digital marketing concepts. Visuals such as charts and graphs help to clarify the meaning behind metrics and can help you create a narrative the client can understand and analyze.
Here are a few ideas for using visual data tools to present ROAS findings to clients:
- Use bar charts. Bar charts are one of the easiest ways to present figures you want someone to compare. You could present the ROAS of various ad campaigns, ads on different platforms, or ads for target audiences. Almost immediately, everyone can see which performs best.
- Use line charts. A line chart is a great way to demonstrate trends over time. Use them to show how ROAS has changed over the past year or several months.
- Use a combination of charts. By pairing two types of charts, you can illustrate more complex data. For example, you can use a pie chart to show how much ad spend went to each audience segment. You can then use a bar chart to show the ROAS for each audience segment. Clients can quickly see whether the bulk of their ad spend goes to well-performing segments, especially if you color code those charts to match.
- Demonstrate the impact of other efforts. Show how other low-cost marketing techniques can combine with PPC ads to drive increased ROAS. For example, show a line chart of ROAS and point to when a new SEO campaign started and how it helped drive up ROAS significantly.
Provide context and benchmarks
Another way to help clients demystify ROAS is to present it with plenty of context. Clients may not really understand that their ROAS is excellent—it’s just a random number to them. But when you show their ROAS next to industry benchmarks or past performance for their own business, they can more clearly understand what a good ROAS really is or how your campaigns have improved performance.
Explain methodology and limitations
Ensure your clients know exactly how you handle ROAS calculations. Provide them with the formula and a list of all the attributes you used to calculate ad spend as well as conversion revenue. Create a flowchart or decision tree that helps clients understand how you attribute revenue to specific ad campaigns.
When clients understand the methodology behind the ROAS metric, you may enjoy several benefits:
- The client becomes a partner in accurate ROAS tracking and can help ensure marketing attribution is correct.
- The client understands the nature and limitations of ROAS, so they can better engage in discussions about this metric.
- The client is likely to have more realistic expectations of ROAS and ad performance.
Make sure you’re transparent about serious limitations in your ROAS calculations. For example, let clients know if you’re unable to attribute whether revenue comes from local SEO or SEM marketing with 100 percent accuracy.
Identify insights and recommendations
Chances are that your clients didn’t hire you simply to track and present metrics. They hired you for your experience in digital marketing strategy. Whether you’re providing additional ad services via an option like Vendasta’s white-label PPC services or not, always provide more than numbers to your clients.
When discussing ROAS, you might also provide:
- Analysis. What, in layman’s terms, do the numbers mean? Break it down so your client can understand the real-life scenarios occurring behind the metrics and why they matter.
- Insights. What specific facts should your client take away from the ROAS figures and discussions? When possible, highlight one big-picture takeaway that’s easy for your client to remember and ponder. You can also cover what seems to be working according to ROAS findings and where various ad campaigns seem to have weaknesses the team should address.
- Recommendations. Talk about what the client might want to do and give specific recommendations about testing new approaches or moving ad spend to different efforts or categories.
Frequently asked questions about ROAS calculation
Are there any adjustments to ROAS calculation I should make for different business models?
While the formula for ROAS is a basic ratio, how you calculate it does depend on your business model and industry. Whether or not you ignore certain expenses, for example, depends on your model. Consider the impact and cost of expenses such as sales and marketing salaries, vendor and partner contracts, commissions and other affiliate payments, and fees associated with ad networks. Whether you include each factor and how detailed you get in adding up costs depends on your business.
What are the limitations or challenges in measuring and calculating ROAS accurately?
It may not be able to easily identify which conversions came from ad efforts, especially if you engage in multichannel marketing. Businesses must engage in detailed, consistent marketing attribution to reduce the impact of this limitation. If you want to base your ROAS on customer lifetime value, or CLTV, that number can be difficult to calculate. You often have to settle for educated estimates.
