Digital Advertising: What is ROAS and How is It Calculated?

Advertising | |By: Janice Masters

With digital advertising goal, measuring your return on investment, or ROI, can be tricky. You want to measure impressions and brand awareness, so this process isn’t as clear-cut as straight-up sales and numbers. In this case, ROI is not the most effective formula for getting a solid gauge of your digital advertising success.

That’s why ROAS—Return on Ad Spend—exists. Rather than calculating investment compared to returns, this formula focuses on your ad campaign’s efficiency and effectiveness.

What exactly is ROAS and why is ROAS important ?

ROAS is a metric that measures the success of digital advertising campaigns, which then helps guide your evaluation of advertising methods; media that is working, messages that are resonating, where to improve—and how it all adds to your bottom line.

When you understand your ROAS, you can better plan for future budgeting and refine your strategy to incorporate more of what is proven to work.

How is ROAS calculated?

Not all of us are math enthusiasts, so if math isn’t your thing you will be relieved to know that the formula for calculating ROAS is surprisingly simple: Just divide the revenue gained from your ad campaign by the dollar amount spent on that specific advertising.

Here’s an example:

In February, Bon Voyage Travel spends $5,000 on a digital ad campaign.
The campaign results in revenue of $15,000.
$15,000 revenue divided by $5,000 ad spend = $3
ROAS = $3 or a ratio of 3:1

For every dollar that Bon Voyage Travel spends on the ad campaign, the return is $3 in revenue.

Don’t forget hidden costs

Getting the most accurate ROAS means ensuring your calculations are comprehensive. All of the associated costs of your ad campaign should be included, otherwise you’ll get an inaccurate result that could make your ROAS seem better than it is.

Common hidden costs include:

  • Staff salaries
  • Ad development
  • Third-party vendor charges
  • Cost per click for banner ads
  • Affiliate commissions

There isn’t a definitive right answer when it comes to what your ideal ROAS should be. The benchmark tends to be around a 4:1 ratio, but ultimately, this depends entirely on your circumstances, your goals, and your business. Achieving your ideal ROAS takes into accountyour ad campaign goals and strategy, a set budget, and a focus on a targeted strategy of select advertising mediums rather than an attempt to use them all at once.

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