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What is ROAS? 

ROAS is short for Return on Advertising Spend.  

Return On Advertising Spend, (ROAS), is a marketing metric that measures the efficiency of online advertising. Return on ad spend (ROAS) is a marketing metric that measures the revenue generated per every dollar spent in an advertising campaign. Calculating return on ad spend is important because it gives you a quick look into profitability. Whether you’re looking into entire campaigns or individual keywords, ROAS can give you quick insight into which keywords, campaigns, or ad groups are the most efficient.  

Calculating ROAS 

ROAS = Gross Revenue from Ad Campaign/Cost of Ad Campaign

For example, a company spends $2,000 on an online advertising campaign in a single month. In this month, the campaign results in revenue of $10,000. Therefore, the ROAS is a ratio of 5 to 1 (or 500 percent) as $10,000 divided by $2,000 = $5.

Revenue/ Cost  or  $10,000/ $2000

ROAS = $5 OR 5:1

For every dollar that the company spends on its advertising campaign, it generates $5 worth of revenue.                            

Why Is Return On Ad Spend Important?

ROAS is essential for quantitatively evaluating the performance of ad campaigns and how they contribute to an online store’s bottom line. Combined with customer lifetime value, insights from ROAS across all campaigns inform future budgets, strategy, and overall marketing direction. By keeping careful tabs on ROAS, ecommerce companies can make informed decisions on where to invest their ad dollars and how they can become more efficient.

Advertising incurs more cost than just the listing fees. To calculate what it truly costs to run an advertising campaign, don’t forget these factors:

  • Partner/Vendor costs: There are commonly fees and commissions associated with partners and vendors that assist on the campaign or channel level. An accurate accounting of in-house advertising personnel expenses such as salary and other related costs must be tabulated. If these factors are not accurately quantified, ROAS will not explain the efficacy of individual marketing efforts and its utility as a metric will decline.
  • Affiliate Commission: The percent commission paid to affiliates, as well as network transaction fees.
  • Clicks and Impressions: Metrics such as average cost per click, the total number of clicks, the average cost per thousand impressions, and the number of impressions actually purchased.


 What Is A Good ROAS ?

An acceptable ROAS is influenced by profit margins, operating expenses, and the overall health of the business. While there’s no “right” answer, a common ROAS benchmark is a 4:1 ratio — $4 revenue to $1 in ad spend. Cash-strapped start-ups may require higher margins, while online stores committed to growth can afford higher advertising costs.

Some businesses require an ROAS of 10:1 in order to stay profitable, and others can grow substantially at just 3:1. A business can only gauge its ROAS goal when it has a defined budget and firm handle on its profit margins. A large margin means that the business can survive a low ROAS; smaller margins are an indication the business must maintain low advertising costs. An ecommerce store in this situation must achieve a relatively high ROAS to reach profitability.

Defining ROI and ROAS

ROAS and ROI are both useful metrics for evaluating the performance  of the money an organization spends. 

One of the biggest differences between ROAS and ROI is that ROAS measures gross revenue generated for every dollar spend on advertising , while ROI accounts for the amount you earn after paying your expenses

ROI optimizes to a strategy while ROAS optimizes to a tactic, yet some marketers use these terms interchangeably. ROI measures the profit generated by ads relative to the cost of those ads. It’s a business-centric metric that is most effective at measuring how ads contribute to an organization’s bottom line.

ROI = profits-costs x 100 / costs

In contrast, ROAS measures gross revenue generated for every dollar spent on advertising. It is an advertiser-centric metric that gauges the effectiveness of online advertising campaigns.

ROAS = revenue from ad campaign / cost of ad campaign

With ROAS, marketing is considered a necessary cost of doing business vs. ROI, where marketing is an investment to grow a business’s profits incrementally. While using both metrics in tandem is useful, the pendulum is swinging back from the widespread use of the ROAS-focused model in digital advertising, to a more rigorous ROI-focused model.