Data Analytics

What is Return on Ad Spend (ROAS) and How to Calculate It

Ecommerce businesses run on ads, especially in the initial stage of lesser brand awareness. As a result, the cost of advertising is one of the biggest expenses that they have to incur to increase their revenue. 46% of most visited ecommerce websites spend up to $1000 on advertising monthly.

But even after spending a hefty sum of money on ads, how do you measure if ads are actually increasing your sales? What are your benchmarks and how do you set KPIs for the impact of your advertising efforts?

Return on ad spend or ROAS is the answer. It measures the revenue generated against every dollar spent on ads.

In business, it’s all about investment and return on that investment. So, you’ll have questions like, is this a good investment? Do my ads cover the full sales potential of my product or service? Are they better than what my competitor has? Are we running ads in the right place or should we shift the platform from say, Facebook to Google?

ROAS answers these questions and keeps your digital marketing campaigns on track in terms of budgets and strategy.

How to Calculate ROAS

Calculating ROAS, unlike other metrics, is fairly simple. It’s the ratio of the total revenue generated to the total cost of the campaign.

Here's the ROAS formula:

ROAS = Total Revenue / Ad Spend

For example, if your ad spend in a campaign is $100, and you generate a revenue of $500 from the campaign, your ROAS will be 5:1.

Keeping track of your ROAS is non-negotiable, especially if you’re experimenting with different ads strategies. You’ll receive quick feedback in the ecommerce space, and knowing the efficacy of your ads in relation to your advertising costs will let you tweak your strategy as you go.

Though the formula of ROAS calculation is simple, the data needed to calculate it is difficult to collect; how do you find the total revenue of a campaign with different purchase channels?

This is where an AI-driven tool like Peel comes in. It takes the heavy-lifting involved in data calculation off your plate, so you can focus on the tasks that only you can do, like, creating the strategy for your next ad campaign.

Once you connect your marketing channels with Peel, you don’t need to worry about manual ROAS calculations anymore. You get automated (and accurate) return on advertising spend data, ready for your team to analyze.

What is a Good ROAS?

A good ROAS defines the success of your ad campaign. The factors that influence ROAS depend on the type of industry and nature of business. Operating costs, profit margins, market size, competition, and average CPC (cost-per-click) are the major deciding factors for ROAS.

There is no “one size fits all” answer to the “what is a good ROAS” question. While the average ROAS sits at around 2:1, it’s recommended that you aim for 4:1 as a safe bet to get the best results from your marketing campaigns.

Some companies, especially startups, work with financial constraints. Some have huge marketing budgets and the comfort to wait and watch the results of long-term marketing strategies. Ecommerce stores, however, rely a lot on ad campaigns to bring in immediate traffic to their stores. In this case, maintaining a ROAS of 4:1 becomes necessary to sustain a healthy ROI and positive impact on your bottom line.

In a highly competitive market, ROAS fluctuates quickly. So, an ad that was generating 8:1 ROAS may fall down to 3:1 when your competitors start acting quickly and sometimes, even steal your ideas. The ROAS resulting from a strategy that covers all the constraints and growth requirements of a business is the winner.

Difference Between ROAS and ROI

Return on ad spend (ROAS) and return on investment (ROI) both play key roles in determining whether your marketing strategies are working.

But with similarities comes confusion! Here’s how you can differentiate:

  • ROAS doesn’t exclude the cost of your product/service in its revenue calculation. ROI takes away your cost from revenue in the calculation.
  • As a result, ROI gives you a better picture of your profits while ROAS tells you the efficacy of your ads.

3 Tips for Improving ROAS

Before you dive into understanding how you can improve your ROAS, you need to make sure you’re tracking it properly.

Are you looking at the correct data and including accurate cost of ads? Did you leave out channels of indirect or offline sales?

This is where you can take the help of an automated tool like Peel Insights. Without accurate analytics in the first step, you’ll fail to measure the effectiveness of your campaigns.

If you’ve got the data collection sorted, here are three ways you can improve your return on ad spend:

1. Lower Cost Per Click

Based on the formula, ROAS is a direct factor of the cost of the ad. This means, if you can decrease the cost of your campaign, your ROAS will rise accordingly. You can do this in two ways: increase the number of clicks at the same cost or decrease the budget without a decrease in clicks.

a. Refine your bidding strategy: The simplest way to lower your cost-per-click (CPC) is to bid for a lower ad position.

This works effectively if you have created a brand name and your potential customers already trust you. They’ll click on the ad, based on your brand, regardless of the position.

Cost Per Click Ad Campaign - Google Ads

That’s not all—you need to experiment with different strategies to find what works best. For example, being in control and setting CPC manually for your campaigns can give you a better return.

b. Optimize your keywords: If you’re seeing a low ROAS over a long period, the reason can be as simple as you’re using the wrong keywords.

After you’ve defined your target audience, go one step further to target a specific funnel stage. The search terms get more specific and long-tail as the prospect moves down the funnel.

For example, the initial search term of “white dress” can change into “white dress with black stripes size 8.” As there’s a large audience with a lower purchase tendency for the generic search term “white dress,” the cost-per-click is higher and comes with a scary bidding war. It's really important that you optimize for not just a better click-through rate, but also a relevant audience.

c. Segment and target: Your ads don’t need to speak to everyone. They have to speak to just one person—your potential customer reading it. If you’re targeting everyone, chances are, your ad cost will be through the roof with a low conversion rate.

Targeting based on location and demographics isn’t enough to reach the exact person you want to. Segment your audience to create different personas based on their customer journey, interests, past orders—and create ads speaking to just them.

2. Optimize for Conversions

If you’ve lowered your CPC, but your audience doesn’t actually make a purchase, it won’t impact the ROAS significantly. You need to generate enough revenue to have a high ROAS.

As a rule of thumb, your landing page shouldn’t take more than 2 seconds to load and should be designed to guide users to the checkout. This means a clearly designed and in-focus CTA, appealing visuals, and crisp copy.

Shoppers love personalization. Imagine walking into a bookstore with the books arranged by your preferred genre. That’s the effect a personalized ad can create. Based on your segmented audience, hyper-personalize the ads with the customer data you have.

This is means of attracting the right customers who will bring higher value to your store over time. If fact, hyper-targeted ads that hit the right segments will yield higher customer lifetime value (CLV), which is invaluable to your business.

A common pet peeve of shoppers is mismatched promises of ads and the actual offer on the landing page. Avoid this at all costs. You’ll not only lose ad money, but you also risk losing a potential long-term customer with tactics like this.

3. Increase Your Average Order Value

The total revenue generated is what defines your ROAS. If you can increase your average order value (AOV), your ROAS will improve as a result.

Offer upsells and cross-sells by bundling products together. Do this with the intention of not just improving your ROAS, but giving your customers what they might need—show your customers that you understand their pain points. Any strategy that both caters to your customers needs and increases average revenue per customer is an overall win for your business.

Product Suggestions Increase Average Order Value (AOV)

Calculating ROAS with Peel

ROAS is an important metric for the growth of your ecommerce business—it’s the needle of your compass. Calculating ROAS inaccurately is similar to following the direction of a broken compass that always points south.

If you’re running multiple ads for different keywords, it can get so overwhelming that you might lose track of this important metric.

In this age of automation, claim your time back and dedicate it to strategizing by automating any tasks you can. In this case, you can automate the most important step of ROAS calculation with Peel. Once you connect it with your Shopify store and Google and Facebook ads accounts, it takes care of the rest. You can then focus on “how” to improve your return on ad spend, rather than the calculation of it.

Integrate Peel with your Shopify store today to automate your advertisement analytics.

Automated Analytics Free Trial - ROAS