So how do you calculate Return on Ad Spend (ROAS), and how important is it when building a successful marketing budget? It represents the amount of revenue generated for every dollar spent on advertising and should be a major part of forecasting revenue from your marketing budget, along with the ROI from your SEO efforts and any costs from ad placements or agency fees. Concentrating your marketing goals around a positive ROAS can lead to some big gains; for example, we were able to achieve 2400% ROAS as part of an award-winning campaign for one client (more on how that happened in a minute).
The basic formula to calculate ROAS is quite simple:
For example, if you spent $1,000 on an ad campaign and it generated $5,000 in revenue, your ROAS would be:
This means that for every dollar you spent on advertising, you received $5 in revenue. A ROAS of 1 indicates you're breaking even, while a ROAS greater than 1 means you're generating more revenue than what you're spending on advertising.
It's important to note:
1. Gross Revenue vs. Net Profit: ROAS focuses on revenue, not profit. It doesn't account for the costs of goods sold, operating expenses, or other costs. For a more complete picture of an ad campaign's effectiveness, you'd also want to consider the Return on Investment (ROI).
2. Break-even ROAS: This is the ROAS you need to cover all your costs. If your profit margin is 20%, then your break-even ROAS is 5 (because 1 divided by 0.20 equals 5).
3. Benchmarking: Ideal ROAS can vary widely depending on the industry, business model, and objectives. For some businesses, a ROAS of 3 might be outstanding, while others might aim for a ROAS of 10 or higher.
4. Other Metrics: While ROAS gives a direct measure of the return from ad spending, other metrics like Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC), and others can provide a more holistic view of the effectiveness and long-term sustainability of marketing efforts.
To ensure an accurate ROAS calculation:
- Make sure you're tracking all revenue correctly linked to the ad campaign. This might require integrating ad platforms with e-commerce or sales platforms.
- Ensure you account for all ad-related costs, including creative development, platform fees, and any other associated costs.
You should be regularly monitoring and analyzing your ROAS to make informed decisions about budget allocation and campaign optimization in digital marketing.
What ROAS Means for Your Marketing Strategy and Budget
Creating a marketing budget for any business is a complex task, especially if you need to consider additional factors like data security or compliance because of your industry. Ads are an essential component of any successful growth strategy, and so is getting the most from your marketing budget. With both of these things in mind, your ROAS becomes one of the more important metrics for you to get right. Here's how and where ROAS can impact your marketing strategy as you budget for growth:
Prioritization of Marketing Channels
- How ROAS impacts your budget: By measuring the ROAS of each marketing channel (e.g., search ads, social media ads, display ads, email marketing), you can identify which ones provide the best return for your investment.
- Where to make changes: Allocate more budget to high-performing channels and reconsider or optimize low-performing ones.
Optimization of Ad Creatives and Targeting
- How ROAS impacts your budget: Monitoring ROAS allows you to test different ad creatives, targeting options, and landing pages to see which combinations yield the best returns.
- Where to make changes: Use insights from high ROAS campaigns to improve or replicate success in other campaigns or locations.
Geographical Budget Allocation
- How ROAS impacts your budget: This is especially important for a multi-location business, where the ROAS might vary across different locations due to factors like competition, local preferences, and demographics. A bank or healthcare facility with multiple branches across different regions will have fluctuations in competition, audience needs, and more that impact how much of a return those businesses can expect from their ad budgets.
- Where to make changes: Allocate more budget to locations with higher ROAS and optimize campaigns in locations with lower ROAS.
Addressing Industry Pain Points
- How ROAS impacts your budget: By linking specific campaigns to industry pain points and measuring their ROAS, you can see which pain points resonate most with your audience and which marketing messages are most effective. For example, if you’re a healthcare company serving the public, you’ll want to ensure your ads address issues like patient wait times, telehealth adoption, and healthcare costs that will inspire viewers to engage with your ads.
- Where to make changes: Emphasize and allocate more resources to campaigns addressing pain points that have a high ROAS, indicating strong market interest or resonance.
Refining Customer Segmentation
- How ROAS impacts your budget: Analyzing the ROAS of campaigns targeting different customer segments can provide insights into which segments are most responsive and profitable.
- Where to make changes: Optimize your audience targeting based on segments that deliver a higher ROAS, potentially refining your buyer personas.
Feedback Loop with Sales
- How ROAS impacts your budget: By understanding the ROAS, marketing teams can have more informed discussions with sales teams about lead quality, conversion rates, and the lead-to-customer journey.
- Where to make changes: Use ROAS data to ensure alignment between marketing and sales goals, refining strategies collaboratively. Connecting one manufacturing client’s paid media data with valuable CRM information from the sales team is what led to the big numbers we mentioned earlier. It takes a great deal of planning, but the end product benefitted both marketing and sales, and helped the client continue to grow their business.
Budget Justification and Forecasting
- How ROAS impacts your budget: A consistent and strong ROAS is a persuasive metric to justify marketing budgets to senior management or stakeholders.
- Where to make changes: Use past ROAS data to forecast future budgets, setting clear expectations about potential returns.
Decision-making for New Initiatives
- How ROAS impacts your budget: Before launching new marketing initiatives or exploring new marketing channels, estimate the potential ROAS based on historical data and industry benchmarks. And with the ability to test and learn quickly, you can optimize those returns to hit and exceed your goals.
- Where to make changes: This can guide decisions on whether to pursue a new initiative, how much budget to allocate, and what KPIs to monitor.
Optimizing Marketing Mix
- How ROAS impacts your budget: While ROAS is predominantly used for digital campaigns, its insights can impact decisions on offline marketing strategies as well. Digital platforms are finding new ways to improve their products by embracing traditional marketing, so find the right mix to match your brand and audience.
- Where to make changes: Decide on the mix of online vs. offline, organic vs. paid, or brand-building vs. direct-response strategies based on ROAS data.
Optimize ROAS To Set A Successful Marketing Budget
As you address the unique challenges and pain points of your industry, consistently optimizing for ROAS ensures that your marketing budget is spent efficiently, helping your business overcome those obstacles. This makes your campaigns more effective and builds credibility and trust with stakeholders who see measurable returns on investment. If you want us to tell you more about how we create growth-oriented budgets for our clients, and what our strategists would suggest for your marketing budget, get in touch with us today.
