What is ROAS
ROAS stands for return on ad spend and is a marketing metric that measures how much revenue you generate for every dollar spent on the marketing channel you are reviewing.
How to calculate ROAS
To calculate ROAS you first find your total revenue derived from the marketing channel you want to look at then divide it by the total amount you spent marketing on that channel.
ROAS = (Revenue)/(Cost)
For example, if you spend $100 on Facebook in one month and your campaign generated $200 in revenue then your return would be:
$200/$100 = 2:1 or 200%
This means that for every dollar spent on that channel you get two dollars back.
Why does ROAS matter?
ROAS helps you quantify how well each of your ad channels is doing and how they contribute to your bottom line. Combined with other important metrics your ROAS helps you decide which channels to place your marketing budget for the best profit.
What is the average ROAS
A good ROAS depends on many things like the profitability of your business and operating costs, while there is no “ideal” metric, a benchmark in the industry is 4:1. So every dollar spent on advertising makes you $4 in revenue.
The goal of your business also affects the “ideal” metric of your ROAS. A new startup may want a higher ROAS while an older company with long term goals may want a smaller ROAS with a focus on growing the customer’s lifetime value.
Your operating costs also have a huge impact on your ROAS. If your business has a high overhead you want to keep your ROAS high and will likely look at more of a 10:1 ratio.
What is a good ROAS
To ensure a good ROAS is being produced by your marketing team you should be looking to ensure they are between 4:1 and 10:1. If your ROAS for a given channel is 3:1 or under you may want to rethink that channel or work on optimizing it by lowering the total cost or increasing the revenue on each item.