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The return on ad spend is a key metric for any marketing campaign.
Because advertising is a tool to enhance your profit, not an art.
And you’re on the right page to learn how to calculate your ROAS.
In this article, we'll discuss:
- What ROAS is and how it differs from ROI
- Tools you can use to assess your ad spend, ROAS, and ROI
- A neat ROAS calculator (that’s also free)
- 9 Factors that can affect your ROAS
- 5 situations when a small ROAS is actually good
Plus, we’ll share insider tips and stories from our experience as an influencer marketing platform.
Keep reading below.
TL;DR:
- The article focuses on Return on Ad Spend, a crucial metric for evaluating the effectiveness of advertising campaigns.
- ROAS vs. ROI: It distinguishes between ROAS (revenue from ads divided by cost of ads) and ROI (Return on Investment), emphasizing that ROAS is specific to advertising spend.
- Calculating ROAS: Provides a formula for calculating ROAS and examples to illustrate its application in different scenarios.
- Factors Affecting ROAS: Discusses various elements like brand popularity, type of advertising, customer reviews, and product pricing that can impact the ROAS of a campaign.
- When Low ROAS is Acceptable: Highlights situations where a lower ROAS might still be beneficial, such as in brand building, customer lifetime value, and market penetration strategies.
- Break-Even ROAS: Explains that a break-even ROAS is 100%, meaning the ad revenue equals the ad spend.
- ROAS Calculator Tool: Introduces inBeat's ROAS Calculator, a tool to easily calculate and interpret ROAS and ROI for ad campaigns.
- Additional Costs Consideration: Stresses the importance of accounting for operational costs like production and shipping when evaluating ROAS.
- Optimizing Ad Campaigns: Offers insights and tips on how to improve ad campaign strategies for better ROAS, including the use of influencers and keyword strategies.
- Final Advice: Encourages the use of the free ROAS calculator and other tools available in the inBeat toolkit for optimizing marketing and advertising campaigns.
What Is ROAS?
ROAS, or Return on Ad Spend, measures the effectiveness of advertising campaigns.
So, it’s one of the most important digital marketing metrics.
ROAS is calculated by dividing the revenue generated from ads by the cost of those ads.
For instance, if one of our clients spends $1,000 on an influencer marketing campaign and it results in $5,000 in sales, their ROAS would be 5:1.
Thus, for every dollar spent, they earn five in return.
Insider tip: If you’re using a new advertising channel, compare your ROAS:
- Between different campaign stages
- With the profit from other advertising sources
That will help you zero in on the highest-performing channel.
How Do You Calculate Advertising?
As we explained in the previous section, ROAS entails dividing your revenue by the advertising cost.
So, you first need to calculate that advertising spend.
Calculating advertising costs revolves around two models:
- Cost-Per-Click (CPC): In PPC campaigns (pay-per-click), the cost is incurred each time someone clicks on an ad.
- Cost-Per-Impression (CPI): CPI charges are based on the number of times an ad is viewed.
For a comprehensive calculation, tally up the cost of each ad unit and multiply it by the total number of clicks or impressions.
For instance, at inBeat, if we launch a campaign with a CPC of $0.50 and receive 2,000 clicks, the total advertising cost is $1,000 (2,000 clicks * $0.50 per click).
The formula for calculating advertising cost can be either:
- Total Cost = Number of Impressions * Cost Per Impression
- Total Cost = Number of Clicks * Cost Per Click.
This detailed approach allows us to evaluate the efficiency of different advertising strategies and optimize our campaigns for maximum ROI.
And that brings us to the next point.
How to Calculate ROAS?
ROAS is essentially the ratio of revenue generated from advertising to the cost incurred in advertising.
So, to estimate ROAS more precisely, you need to:
- Analyze past trends
- Estimate the revenue generated for each dollar spent.
Insider tip: At inBeat, we often utilize our Ad Spend Calculator tool to streamline this process.
The formula for ROAS is straightforward:
ROAS = (Revenue from Advertising / Cost of Advertising) * 100.
Let’s say one of our clients spends $500 on TikTok UGC ads in a month.
- Their ad revenue for that month is $8,000.
- Their ROAS would be ($8,000 / $500) * 100 = 1,600%.
This indicates a significant return of 1,600% per dollar spent on advertising.
Pro tip: If your ad campaigns are powered by influencers, use a free money calculator to assess your initial ad spend per influencer.
Here’s what a post from fitness influencer Bethany Ruth would cost:
Now, let’s say we’re not using influencers for our ads, so the ad fatigue is higher.
And fewer people are seeing/ buying these products.
So, we make $400 in revenue with the same ad spend. In this case, our ROAS would be ($400 / $ 500) * 100 = 80%.
That brings us to the next point:
How to Calculate Break-Even ROAS?
Remember: Any ROAS below 100% signifies a loss, as the revenue does not cover the advertising costs.
The break-even ROAS means not spending more on ads than you can earn.
That means break-even ROAS is 100%.
Therefore, your breakeven revenue from ads is equal to what you spend on advertising.
ROAS vs ROI
Don’t confuse ROAS with ROI (Return on Investment).
While ROAS focuses solely on advertising spend and revenue, ROI considers the overall profitability of the investment.
Insider tip: Our ROI Calculator is a helpful tool for understanding this broader financial perspective.
The ROAS Calculator ensures accurate interpretation of these key metrics so you can make informed decisions about future advertising investments.
Here’s the ROI calculation formula for ads:
ROI = (Revenue - Cost of Ad) / Cost of Ad.
For example, if you get $3000 from a $100 ad created by a nano-influencer, your ROI is 29%.
Side note: We’ve included the ROI-based calculation inside our ROAS calculator.
But more on that in a second.
For now, let’s answer this question:
What Is a Good ROAS?
A good ROAS varies by industry, but typically, a ROAS of 4:1 or 400% is considered acceptable. This means you earn four dollars for every dollar spent on advertising.
Insider tip: Determining a good ROAS is not just about looking at obvious advertising costs versus revenue.
It also involves considering other operational costs and payments.
A good ROAS should account for additional costs involved in running a business, including:
- Production
- Shipping
- Salary costs
- Other marketing costs
- Business overhead costs
Warning: The revenue generated from advertising must cover the ad spend and these additional expenses to be considered profitable.
Let’s see a quick example:
If inBeat spends $1,000 on advertising and generates $4,000 in revenue, the ROAS is 400%.
However, if our total operational costs, including the ad spend, are $3,500, the actual profit is only $500.
In this scenario, while a 400% ROAS may initially seem impressive, it’s just enough to cover costs and yield a small profit.
When Is a Lower ROAS Good?
Remember: ROAS is just one metric. Interpret it within the bigger picture of your brand, market situation, and campaign goals.
Here are some cases in which a lower ROAS can still be considered good:
- High-profit margins: If a product has a high profit margin, a lower ROAS might still lead to overall profitability. Suppose a company sells luxury items with a significant markup. In that case, the actual profit per sale might be high enough to sustain the business, even if the advertising does not yield a high return in terms of percentage.
- Customer Lifetime Value (CLV): Businesses focusing on long-term customer relationships might accept a lower ROAS in the short term. For instance, the lifetime value of a customer can be significantly high (like in subscription models or repeat purchase industries). In this case, making less on the initial acquisition through advertising can be offset by the profits made over the customer’s lifetime.
- Brand building and awareness ads campaigns: Sometimes, the goal of a digital advertising campaign is more about building brand awareness than immediate sales. For these campaigns, a lower ROAS is often acceptable. Your primary objective of expanding the customer base through increased brand visibility can lead to future sales. And, more importantly, to customer loyalty.
- Market penetration strategies: When trying to enter a new market or launch a new product, you might initially accept a lower ROAS. The focus here is on gaining market share and familiarizing consumers with the product or brand. Of course, you expect that this initial investment will lead to higher profitability in the future.
- Strategic product cross-selling: For businesses with multiple product lines, a lower ROAS on specific products can be acceptable if it leads to cross-selling higher-margin items. For instance, selling a product at a lower profit (or even a loss) is a strategic choice if it drives sales of complementary, high-margin products or services.
How to Use a ROAS Calculator?
inBeat’s Return on Ad Spend Calculator will help you optimize your marketing budget and campaign performance.
Use it to determine if your ads allow you to reach your advertising goals.
Here’s what you have to do.
The Simple Mode
- Fill in how much you spend on ads.
- Add your direct revenue from ads.
- See your ROAS and interpretation.
The ROI Mode
1. Insert your ad spend.
2. Insert your ad revenue. If you don’t know your direct ad revenue, click the right-hand button, and we’ll help you select a projection.
3. Add the profit margin.
4. The spend calculator will automatically fill in your ROAS and ROI based on these figures.
Pro tip: Play around with different ad spends and projected revenues to better understand what would be a good ROAS for your campaign.
Benefits of Using a ROAS Calculator
Using an online ROAS (Return on Ad Spend) calculator offers several benefits, especially if you want to efficiently and accurately assess your advertising campaigns’s effectiveness.
Here are some key advantages:
- It’s easy: Online ROAS calculators simplify the process of calculating return on advertising spend. Instead of manually crunching numbers, you can quickly input their ad spend and revenue data to receive instant results. This efficiency saves valuable time, especially for marketers and business owners who need to make fast, data-driven decisions.
- It’s correct: Manual calculations can be prone to errors, especially when dealing with large data sets or complex advertising campaigns. Online calculators reduce the likelihood of errors, ensuring that the ROAS figures are precise. And everyone knows that accurate data is crucial for making informed marketing decisions.
- It’s consistent: With an online calculator, you can consistently calculate ROAS across different campaigns and periods. This consistency allows you to compare your advertising strategies more accurately.
- It has educational value: If you’re new to digital marketing or unfamiliar with the ROAS metric, online calculators help you understand the “how” and the “why” behind the calculations. As such, you learn how to interpret the results better and apply this knowledge to your marketing strategies.
Variables that Affect Your ROAS Metric
Did you ever wonder why a seemingly worse ad campaign has a higher ROAS?
We’ve seen plenty of similar scenarios at inBeat.
So, we tapped into our experience to show you the most important variables that might mess with your ROAS metric.
Understanding these elements helps optimize your ad spend and achieve the best possible return.
1. Brand Popularity
Established brands typically experience higher ROAS due to existing customer loyalty and recognition. In contrast, new brands in the market may initially see a lower ROAS as they work to build awareness and trust among consumers.
2. Type of Advertising or Ad Source
The advertising medium impacts ROAS. For instance, banner ads might have a lower direct ROAS due to lower click-through rates but are effective for increasing brand awareness.
We also noticed that using influencers in social media ad campaigns decreases ROAS considerably and maximizes advertising efforts.
Insider story: For Genomelink, this strategy helped us decrease customer acquisition costs by 3x in just 3 months and increase ROAS accordingly.
3. Campaign Effectiveness
If your ROAS is underperforming, especially in a new market, it’s important to revisit your audience targeting.
Refining your campaign to align with your target audience can significantly improve ROAS.
Insider tip: When we work with clients through our inBeat agency, we constantly review and optimize campaigns to maintain a strong ROAS.
4. Customer Reviews
Positive reviews can boost ROAS by enhancing credibility and trust in your product or service.
They serve as social proof that can influence purchasing decisions.
That’s why user-generated content is so important for brands.
Insider tip: Influencers can also produce similar content, but the advantage is they know how to pull at customers’ heartstrings. And they already have a well-established base of followers to build your exposure with.
That’s what we did for cold-press juicer brand Hurom.
5. Product/Service Description and Images
Clear, appealing, and informative descriptions and images are crucial in convincing potential customers.
They play a significant role in converting interest into sales, affecting ROAS.
Insider tip: Use our free ad mockup generators to test different ad images and zero in on the highest-performing ones.
Here’s one neat example I spent just 10 seconds on:
6. Product Pricing
The price of your product or service must align with its perceived value and the target audience’s willingness to pay.
Competitive pricing can enhance ROAS by increasing the likelihood of purchases.
7. Keyword Strategy
Your ads should have a solid keyword strategy behind them.
Short-tail keywords reach a wider audience but might have lower conversion rates and higher costs.
In contrast, long-tail keywords target a more specific audience with a higher intent to purchase, often resulting in better ROAS.
So, balance your keyword strategies based on your campaign goals to maximize your profit.
8. Cost Per Click (CPC)
Both high and low CPC can negatively impact ROAS.
A CPC that’s too low may not reach your target audience effectively, while a high CPC can deplete your advertising budget quickly without guaranteeing proportional returns.
So, have your advertising team find an optimal CPC to get a positive ROAS and maximize your marketing efforts.
9. Landing Page Quality
A well-designed landing page can significantly boost conversion rates and ROAS.
So don’t ignore it.
It should be engaging, informative, and user-friendly.
Key elements include a clear Call To Action (CTA), product information, pricing, images, and reviews.
Tweak these elements, and you can see a boost in your ROAS.
Wrapping Up
If you’ve read so far, you now know how to calculate your ROAS, what factors can decrease your ROAS, and when a low ROAS is not a tragedy.
So, use the free ROAS calculator we’ve devised.
And browse the other free tools in the inBeat toolkit to optimize your marketing or advertising campaign.