ROAS is an acronym that stands for Return on Advertising Spend. It is an important key performance indicator in online marketing. The ROAS statistic is based on the ROI principle, but it refers to the portion of the actual profits obtained from each ad spend in dollars. While the overall ROI is the link between revenue and costs, ROAS is used to browse individual ads and campaigns.
How does it work
The ROAS indicator can be used to answer questions related to the effectiveness of a specific ad:
- How are my sales promotion expenses related to paid links to the sales generated from them?
- Do my ads cause any conversions?
- Which ads convert well and which ones don't?
- For which ads should keywords be deleted and for which ads should my spend or CPC be increased?
ROAS is a suitable tool for these questions, since it shows the advertising benefits and costs that are spent on it in a percentage proportion. ROAS is calculated as follows:
ROAS = (benefits / costs of commercial promotion) * 100
If a business generates a profit of 1000$ and the ad placement amounts to 200$, the ROAS would thus be 500%. The value should be as high as possible, so that the costs of commercial promotion represent only a fraction of the benefits. However, depending on the type and purpose of the project, the ROAS may be lower. For example, when launching a new website or branding campaign, where the long-term effects are more important than the effectiveness of the ads placed.
However, a high ROAS value does not automatically represent the success of a company. If the product being advertised requires very high production costs, the ROAS value may be high, but the actual benefit may be low. The degree of usefulness and information of the ROAS indicator therefore depends on the company, the campaign and its objectives.
Relevance for online marketing
Unlike other key figures in online marketing, which are monetarily independent, ROAS shows the link between advertising benefits and costs. The clicks generated by the commercial promotion do not say anything about the percentage of the profits that these clicks may have caused. ROAS, on the other hand, offers an exact ratio and allows marketers to control their campaigns, associated expenses, and profits. The ROAS value is used primarily in the context of a Google AdWords strategy when conversions with very different amounts are expected. This requires a possible conversion tracking. With Google AdWords, the target ROAS corresponds to the average value of a conversion, which is the target value per euro invested in the ad.
At the same time, key figures from ROAS can be transferred to scoreboards to provide a tool for decision makers in management positions. This is particularly useful in planning future campaigns, but also gives an idea of the ROAS figures for the last months and years if markers are regularly created. Thus, changes in the effectiveness of individual ads and campaigns can be responded to quickly.