How to calculate ROAS (Return on Ad Spend)

Return on Ad Spend, or ROAS, is an important marketing metric businesses can use to measure the effectiveness of their paid advertising campaigns.

Though ROAS lives in the same family as ROI (return on investment), it focuses exclusively on the money you spend advertising on channels like Google Ads, Facebook, Instagram, and other digital ad spaces.

Once you understand how to calculate ROAS, you’ll be able to analyze your advertising campaigns, fine-tune your marketing strategy, and grow your revenue.

Fortunately, ROAS is a relatively simple metric to calculate. Here’s how you do it.

Next lesson: How to calculate gross profit margin

What is ROAS?

Return on Ad Spend (ROAS) is a percentage that shows how much revenue you earn for every dollar spent advertising your business.

Understanding your profit margins is crucial as it directly impacts your ROAS goals. You can calculate ROAS using your overall marketing spend and revenue figures, or hone in on a specific product.

ROAS is closely related to your Customer Acquisition Cost (CAC), which tells you how much money you invest, on average, to convert a single customer.

You may also come across ROAS when calculating Gross Profit After Advertising Cost (GPAAC), a figure that represents your gross profit after subtracting advertising costs.

Return on Ad Spend (RAOS) Formula 

The ROAS formula is: ROAS = (Revenue generated from advertising / Cost of advertising) * 100

To calculate your ROAS, here are the figures you’ll need on hand:

Advertising spend

You need an accurate figure of how much you spend on advertising, either overall or for a single product or product set. 

Revenue earned

The other primary figure you need to calculate ROAS is the revenue you earned as a result of your advertising campaigns. This is why many companies use surveys that ask, “Where did you hear about us/this product?” By gathering this information, and marrying it to data provided by ad platforms, it becomes much easier to attribute revenue to specific marketing campaigns.

Additional advertising costs

In addition to the dollars you put into a marketing campaign directly, you may also spend on advertising in other ways. For example, you may have to pay vendor or influencer commissions. Adding these figures to your advertising spend number will give you deeper insight into the ROAS meaning for your business. 

What is a good ROAS for your business? 

Because ROAS is represented as a percentage, you always want this number to be over 100%. Anything less than that means you are spending more on ad spending than you’re earning—in other words, your marketing campaigns aren’t giving you much return on investment.

For example, let’s say you run an online clothing shop, and in July, you spent $2,000 on Instagram advertisements for your new line of sandals. During that same month, you earned $6,000 in revenue from the sandals.

In this case, your ROAS calculation would be:

(6,000/2,000)*100 = 300%.

In other words, you’d essentially be earning $3 for every $1 you spend on advertising.

That may seem like a good rate, but the higher your ROAS, the more you’ll improve your bottom line, so it’s best to aim even higher than this if you can.

Many businesses aim for a 4:1 ratio with ROAS, so slightly higher than the figure we mention above. But the value of your ROAS depends on the overall health of your business—if you have the budget to experiment with advertising, then a lower ROAS may be acceptable. If you’re aiming to grow your business rapidly, then higher ROAS will mean you achieve that goal sooner.

How to use ROAS to improve your business

ROAS is one of many metrics you can use to increase revenue and cut down on the cost of running your business.

The more specific you can get with your ROAS, the more data you’ll be able to use—this is why it’s valuable to calculate ROAS for individual ad campaigns and/or products, rather than simply an overall period.

Once you have your ROAS figure, you can use it to leverage your business by:

Analyzing your marketing efforts. The most obvious way to use ROAS is to evaluate how effective your various advertising efforts are. Those with higher ROAS indicate that your ads are resonating more with your customers, while those with lower ROAS should be reevaluated to see if they can be improved (or scrapped altogether).

Tracking ROAS over time. Tracking ROAS over time allows you to see trends and make informed decisions about your advertising strategies.

(Tresl Segments makes it easy to customize your marketing. Get started.)

Adjusting your prices. Sometimes, a lower ROAS may indicate that a product you’re selling isn’t priced appropriately. If an advertising campaign is getting lots of click-throughs and pulling in a lot of traffic, but you’re still seeing a low ROAS, you may be able to solve the issue by increasing the price on the product in question.

Gauging brand sentiment. Naturally, brands that have a better connection with their audience and a better brand perception will see higher Return on Ad Spend. If you aren’t able to improve your ROAS by adjusting your advertising campaigns or pricing structure, then you may need to do more legwork to garner trust and recognition with your audience.

ROAS: Bringing it all together

There’s a lot to be learned from your return on ad spend, especially when you use it as part of a larger data analysis strategy. By comparing the ROAS of two different ad campaigns, you can determine which strategy is more effective.

Data is our passion at Tresl—we help Shopify users compile and analyze a wide array of metrics that help you gain a deeper understanding of your customer base and enhance your marketing campaigns.

‍