Return on advertising spend (ROAS) is a measure of money earned from digital advertising. Tracking ROAS is critical to ensuring advertisers are seeing profits and not losses; if losses are observed, ads can be quickly improved to increase returns. To find your own ROAS, simply divide your ad revenue by your ad costs.
Many businesses waste advertising budgets on ineffective campaigns that fail to yield a positive return. Avoid this costly mistake by hiring a professional ad management company like Hibu. With Hibu, you get a dedicated ad manager who will strategically build better campaigns to achieve your advertising goals and increase your ROAS. Get started today.
What Is ROAS?
ROAS is a measurement of revenue per dollar spent on advertising. It is calculated by dividing ad revenue by ad cost. The resulting amount is a good measurement of an ad campaign’s success. If a ROAS is less than one, an ad campaign is losing money. If it is more than one, it’s generating profit.
How to Calculate ROAS in 5 Steps
ROAS is calculated after an ad campaign has finished running. To calculate ROAS, collect all necessary data—including your monthly ad spend, average cost per click (CPC), conversion rate, and customer lifetime value (CLV). Then, divide your monthly ad spend by the average CPC to get monthly clicks. Multiply clicks by average conversion rate to get your number of conversions. Multiple conversions by your estimated customer lifetime value to get ad revenue.
Here’s how to calculate ROAS in five steps:
1. Collect Relevant Data
Start by collecting all of the data that you need to calculate return on ad spend on a particular campaign. This includes your monthly ad spend, average cost per click (CPC), conversion rate, and your estimated customer lifetime value. All of these, except customer lifetime value, can be found in your advertising account, such as Google Ads Manager or Facebook Ads Manager.
Determine your average monthly ad spend, which should be the same as your monthly ad budget. This is available within your advertising account. For example, for Google Ads, it’s available in Ads Manager. Navigate to the campaign of choice by clicking “Campaigns” from the left-hand menu and selecting the campaign from the list. Multiply your daily budget by 30.2 (the average length of a month in days) to get your average monthly ad spend.
Cost per Click (CPC)
Next, determine your average cost per click. To do this, navigate to your campaign and find the average CPC column. In Google Ads, it is the column labeled “Avg. CPC.” In Facebook Ads Manager, it will be in the column labeled “Cost Per Result.”
Conversion rate represents the percentage of times users interacted with your ad compared to the number of times people converted. Conversion points (actions) are set up in the ad creation process, and are chosen by the advertiser. Actions could be anything from signing up for a newsletter to completing an online purchase. Your average conversion rate will be provided in a separate column in your advising account.
Customer Lifetime Value
Customer lifetime value, CLV (or sometimes called CLTV), measures how much a customer is worth to a business over the lifetime of the business. It can be complex to calculate, depending on the business, but in its simplest form, CLV is how much revenue is generated per customer over the life of their relationship with the company. For a campaign to be profitable, the cost to acquire a customer should be less than their CLV.
For example, a pet grooming business estimates that the average new customer has one dog that they groom three times per year for two years, with a profit of $25 per grooming. This means their estimated CLV is around $150 per new customer.
2. Divide Monthly Ad Spend by Average CPC
Divide your monthly ad spend by your average cost per click to find your number of monthly clicks. For example, let’s say a business is calculating ROAS on a Google Ad. It spent $600 per month on ads and had an average CPC of $2.11.
The calculation: $600 / $2.11 = 284.36 clicks per month on average
3. Multiply Monthly Clicks by Your Conversion Rate
With your clicks per month calculated, multiply clicks per month by your conversion rate. The result will be your number of conversions per month. Using the previous example, let’s assume the business had an average conversion rate of 2.5%.
The calculation: 284.36 x .025 = 7.1 conversions
4. Multiply Conversions by Your Average Customer Lifetime Value
Take your number of monthly conversions and multiply it by your estimated customer lifetime value, or CLV, to get your estimated ad revenue. Following our example, let’s say the business has an estimated CLV of $400.
The calculation: 7.1 x $400 = $2,840 gross monthly ad revenue
5. Divide Ad Revenue by Ad Spend
Lastly, divide ad revenue by ad spend to get your return on ad spend for the campaign. Remember that this is a ratio of revenue generated per dollar of ad spend, so $1 is the break-even point. If the resulting number of this equation is greater than one, the ad campaign is profitable. If less than one, it is operating at a loss.
The calculation: $2,840 / $600 = 4.73 return on ad spend (a positive return)
How ROAS Is Used
ROAS is primarily an indicator of the success of a specific advertising campaign. Low profits or losses are generally indicators that ads should be improved. However, ROAS doesn’t provide any insight into what might improve an ad’s performance. For that, it’s best to consider more specific engagement metrics offered by your advertising platform, such as impressions, views, clicks, and conversions. Learn more about strategies for ad optimization below.
What Is a Good ROAS?
The average ROAS across all industries is 2.87:1, according to a study by Nielsen. This means that for every $1 spent on advertising, the average company makes $2.87. What constitutes a good ROAS will vary from business to business; however; just be sure to use $2.87 as a benchmark.
An acceptable ROAS for your company is determined by several things, including your budget, your ad campaign goals, and duration of your ad campaigns, among other factors. As you calculate your ROAS, also be sure to consider your ultimate ad goals; in some cases, increased brand awareness is a sufficient measure of ad success.
6 Ways to Optimize Ads for a Higher ROAS
ROAS provides campaign performance insights, which can be used to manage campaigns strategically. To increase your return on ad spend, you will need to decrease your average cost per click, increase clicks, or increase conversions. To do this, advertisers may choose to improve ad content, optimize landing pages, try A/B testing, narrow their audience, try different offers, and test device types and ad schedules.
Here are six ways you can improve your ads for a higher ROAS:
Improve Ad Content
Enticing ad copy and compelling imagery will increase the clicks on your ad, which will ultimately increase your ROAS. To make sure you’re getting as many clicks as possible, include short but relevant copy that’s actionable, and align this with a compelling image that coordinates with your ad’s message and your brand. As appropriate, consider incorporating your logo or brand colors in the ad to connect your company with the ad offer.
Use & Optimize Landing Pages
Landing pages are single web pages designed specifically for digital ads to help convert users. A landing page’s design and content are considered by advertising platforms when they determine ad relevance for a given audience. A high-quality landing page will ensure your ads are displayed to more people, increasing the likelihood of clicks and conversions. For more in-depth information and guidance, read our article on how to create a landing page.
Try A/B Testing
A/B testing, or split testing, is where you simultaneously use two versions of ads or landing pages with one differing element. This helps determine which element performs better. For example, you may create two Google Ads that have a different headline to test which gets more clicks. You could also try testing landing pages to see which text, images, or calls to action (CTAs) get more clicks.
Narrow Down Your Audience
Increasing the focus of your audience targeting through your advertising platform will yield a smaller, but more qualified audience. Depending on your audience, this may or may not impact your average CPC. What it can do, however, is increase your conversions because your ads are shown to users who are more interested in what you have to offer. Learn more about the top Facebook ad targeting options.
Try Different Offers & CTAs
Every campaign includes an offer, or an incentive to click an ad and convert on its landing page. Try different offers to see which generates the most clicks and conversions. You can even use the same offer, but with different verbiage to see which speaks to your audience better. For example, a “buy one, get one free” offer might be substituted for a 50%-off discount.
Test Device Types & Ad Schedules
CPCs can vary based on device types—such as computers, smartphones, and tablets—that your ads display on. CPCs also vary based on ad schedules—including time of day and days of the week—that ads are displayed. Test different device types and ad schedules to find which have the lowest CPCs with the highest conversion rates.
5 Tools for Improving Ads & Increasing ROAS
There are lots of tools available to help you improve your ads’ ROAS. The top tools help you strategically manage and optimize your ads with well-designed landing pages, A/B testing, keyword research and insights, and campaign analytics and reporting.
Here are five top tools that can improve ads and increase return on ad spend:
- Leadpages: Leadpages is a landing page builder that makes it easy to create, connect, and manage landing pages. It includes many extras, such as a landing page grader, to help you understand your landing page quality. Plans start at $25 per month.
- Freshmarketer: Freshmarketer is an all-in-one conversion rate optimization suite that helps businesses increase their conversion rate. It includes A/B testing tools, heat maps, funnel analysis, and analytics. It offers a free plan.
- Moz: Moz is a keyword research tool used for search engine optimization (SEO) improvements. It provides keyword data and analytics to help you use your keywords strategically. This information can be applied to website copy as well as ad copy and ad keywords. Plans start at $99 per month, but you can try Moz for 30 days with its free trial.
- Spyfu: Spyfu is a competitor keyword research tool. It tells you which keywords your competitors are using, which can help you be more strategic with your keyword usage in web copy and digital ads. Plans start at $33 per month.
- ReportingNinja: ReportingNinja is a paid search analytics and reporting tool. It gives you a way of visualizing ad performance data, with the ability to compare performance across months, quarters, and years. ReportingNinja has plans starting at just $20 per month.
Whether creating more effective landing page designs with Leadpages, increasing conversion rates with Freshmarketer, researching keywords with Moz and Spyfu, or understanding your performance with reports from ReportingNinja, these tools will help you increase clicks, decrease CPCs, and increase conversions—all leading to a higher ROAS.
”Test several ad creatives and Facebook will optimize to ‘serve’ out the highest performing ones. The better your ads perform, the lower your cost per lead is going to be and the better your ROAS. A higher converting ad with a lower CPM (cost per thousand views) is better than getting a ‘$100 in free ad spend’ with an ad that is not performing well.”
– Matt Erickson, Marketing Director, National Positions
Frequently Asked Questions (FAQs)
Why is ROAS important?
Return on ad spend is important because it indicates how profitable digital advertisements are, and gives businesses the insight to strategically manage and optimize ads for more conversions. Every business with digital ads should calculate ROAS on each ad campaign.
What is a good ROAS?
Return on ad spend, which is the ratio of ad spend to ad revenue, will vary greatly from business to business. However, an average ROAS is around three, so a good ROAS would be over three. The break-even point for ROAS is one, or 1:1, meaning that for every dollar spent on ads, $1 is earned in revenue.
Which is better: paid search or paid social?
Paid search and paid social are both forms of pay-per-click (PPC) advertising. Paid search ads are those that appear in search engines, such as Google and Bing. Paid social ads appear in social networking platforms, such as Facebook and Instagram. User intent is what differentiates the two; users on search engines are actively looking for your business, product, or service, and therefore search ads generally cost more. Learn more in our PPC campaigns ultimate guide.
Should I optimize my landing pages?
Yes, advertisers should optimize landing pages. Optimizing landing pages will help drive more conversions, resulting in a higher return on ad spend. Landing pages are optimized by changing one element of a landing page at a time and testing the impact of the change. These elements include images, messaging, copy, calls to action (CTAs), fonts, and colors. Learn more about how to do landing page optimization.
Bottom Line: ROAS Calculation
Return on advertising spend (ROAS) helps advertisers understand campaign performance with a ratio that shows how much revenue is generated for every dollar of ad spend. Every business using digital ads should calculate ROAS to determine when they should update or optimize their ad campaigns.
Understanding how to use your ROAS calculation results to optimize your campaigns can be difficult. Avoid costly mistakes and improve your ROAS strategy by talking to the digital marketing experts at Hibu. In addition to getting paired with a dedicated digital specialist, you have 24/7 online access to a dashboard to help you see how your advertising campaigns are performing. Learn more by talking to a representative today.