Understanding the ROAS formula to achieve paid media success
If your marketing team has decided to invest in a paid media campaign, it’s important to treat it like you would any other investment. That means having a plan in place to measure its performance.
Once you have a measurement strategy in place, it becomes possible to perform calculations that can help you understand whether the campaign is performing the way you want it to — or if changes need to be made to reach your company goals. The return on ad spend (ROAS) formula is an important calculation that can help you tie your marketing campaign directly to what matters most to your business: Revenue.
Below, we take a closer look at what the ROAS formula is, how it’s calculated, and the different factors that can affect it. We also provide advice you can use to improve this critical metric within your paid marketing campaigns.
What is ROAS?
ROAS, or return on ad spend, is a KPI that marketing teams use to quantify the performance of paid media campaigns. This can include anything from paid search engine marketing (SEM) and social media advertising to email marketing campaigns. It also applies to print, TV and online display, and direct mail campaigns.
The metric directly ties revenue generated by ads to the cost of those ads. This makes it easier to see whether a campaign is effective and profitable, or if it may in some way be missing the mark.
In this way, knowing your return on ad spend empowers you to iterate. Then, you can double down on the campaigns and distribution channels that show the highest returns while abandoning (or shelving) those not performing as you expected.
With enough historical ROAS data, the metric can even be used to inform your paid media advertising and marketing budgets, as well as future revenue projections.
Calculating the ROAS Formula
The formula used to calculate ROAS is a fairly simple one: ROAS = Revenue / Ad Spend
In this formula, revenue refers to the total revenue that can be attributed to a particular paid media campaign, and ad spend refers to the total cost of running that campaign.
An easy rule of thumb for remembering the formula might be to think of it as “revenue over ad spend.”
ROAS examples
To help put ROAS into context, let's calculate it for an ambitious, multi-channel paid media campaign.
In this example, a marketing team ran a single campaign across four channels: Paid search, paid social, email marketing, and online display. They spent $2,000 on each channel. Paid search brought in $5,500 in revenue. Paid social brought in $4,500 in revenue. Email marketing brought in $4,250. And online display brought in $1,750.
To calculate the ROAS for the entire campaign, we would add up all of the revenue the campaign generated, then divide it by the total costs:($5,500 + $4,500 + $4,250 + $1,750) / ($2,000 + $2,000 + $2,000 + $2,000) = $16,000 / $8,000 = 2This means that for every $1 spent on the campaign, the business brought in $2.
But it’s also possible to calculate ROAS for each individual channel to glean more granular insights about how each performed.
When we do this, we see that the ROAS for paid search, as a channel in this campaign, was 2.75 — almost 50 percent higher than the ROAS for the entire campaign. We also see that the ROAS for online display as a channel was 0.875 — meaning it didn’t even break even.
With these insights, the next time the marketing team runs a paid media campaign, it might choose to abandon online display as a channel altogether and allocate those funds to other, higher-performing channels, like paid search, instead.
Recognizing the limitations of ROAS
While ROAS can be an incredibly helpful metric in evaluating the performance of a paid media campaign, it isn’t the only metric you should consider. Other relevant metrics, like customer acquisition cost (CAC) and customer lifetime value (CLTV) are also important parts of developing a holistic view of how your campaigns perform.
Likewise, it’s possible for a campaign to fail in its revenue goals while succeeding in achieving other goals, such as brand recognition. Returning to the example above, ROAS shows us that the online display channel didn’t earn a positive ROI, but it tells us nothing of that channel’s reach, or how it could have potentially contributed to the success of other channels.
Additionally, marketing efforts like events and influencer or sponsored media should also measure engagement and perception instead of ROAS.
With this in mind, it’s important to look beyond the immediate returns your campaign generates and to consider the long-term impact of your paid ad efforts.
Factors affecting ROAS
Many factors can affect how effective your ad campaign performs — and, by extension, the campaign's ROAS. If a campaign performs significantly better or worse than initially expected, it can be helpful to consider these factors as you optimize them:
Targeting: Your campaign's targeting determines who your ads are ultimately presented to. The more relevant your product or service is to a particular audience's needs, the more likely they are to convert on those ads — and the more revenue they will contribute, which will directly influence the campaign's ROAS. With more customers demanding a personalized experience, targeting is particularly important in online channels like paid search and paid social.
Channels: How you choose to distribute your ads will have a material impact on whether or not they arrive effective. Channels can be broad, such as paid search, paid social, and online display ads. They can also be more specific, like which social media platforms you are specifically leveraging for paid search or which websites your display ads appear on.
The channels that make the most sense to you will be those where a.) you know your audience spends its time, and b.) there is an obvious path to conversion or purchase.
Creatives: A lot goes into making an ad that converts. An eye-catching design, memorable copy, and overall “production value” can mean the difference between a campaign that generates revenue for your business and one that flops. Creatives that are of a low quality or that are not properly aligned to the expectations of the target audience can adversely affect your campaign's ROAS.
Landing page experience: Just because an online ad is successful in generating clicks doesn't mean it will contribute revenue. If your landing page is not properly optimized for conversion or presents a poor user experience, it could lead to drop-offs before purchases are made — again, leading to a lower ROAS.
Bid strategy: Other than making your campaign itself more effective, the only other way to improve ROAS is to lower costs. Optimizing your bid strategy for online ads to ensure that you're not overpaying for exposure and distribution can go far in stretching your campaign's budget and improving its ROI.
Creating successful marketing campaigns with ROAS
To get the most value from your marketing campaigns and accurately measure ROAS, you should have several key elements in place:
- Clearly defined goals and objectives. What do you want to achieve with your campaign? For example, are you increasing brand awareness, driving leads, or boosting sales? No matter your marketing goals, have specific, applicable, and measurable goals in place to measure your success.
- Accurate targeting and segmentation. To reach the right audience with your message, you need to understand your ideal customer profile (ICP), their needs, and behavior on various platforms for efficient ad spend and relevant messaging.
- Effective campaign tracking and data collection. Set up proper tracking mechanisms to measure campaign performance and understand ROI and accurately calculate ROAS. This includes using analytics tools, UTM parameters, landing page conversion tracking, and CRM integration.
- Robust data analysis and reporting. Don't just collect data and measure ROAS; gather insights and actionable takeaways. Analyze your campaign data regularly to identify what's working, what's not, and where you can optimize. Visualize key metrics using dashboards, reports, and AI for easy communication and decision-making.
- Agile optimization and iteration. Don't be afraid to adjust your campaign based on your data insights. Continuously test different elements, optimize your spending, and refine your targeting to improve performance over time.
From these, marketers can gain valuable insights from their campaigns, iterate, and ultimately achieve their strategic marketing goals. Remember, ROAS is just one metric to help marketers understand the effectiveness of their paid media.
It's essential to look beyond the numbers and understand the broader impact of your campaigns on brand awareness, customer engagement, and long-term value.
Conclusion
Once you regularly and consistently start tracking the ROAS of your campaigns, you'll suddenly have much more information at your disposal — data you can use to plan future campaigns, adjust your budget, and more accurately forecast future returns. It will also give you insights into ways you can adjust and optimize your currently running campaigns to make them more effective.
Of course, more data will only be helpful to your team if it is easily accessible. The more integrated your data is with the rest of your team's workflow, the more likely they will actually leverage it in making the decisions that matter most.
This is where a Customer Data Platform (CDP) — which sits on top of a cloud data warehouse, integrates with your martech stack, and compiles all relevant information about your customers into one central location — can be especially helpful. CDPs help marketers access real-time data to create Customer 360s and orchestrate campaigns to deliver a personalized customer experience.
Interested in learning more about how a CDP can help you achieve your paid media goals? Request a free demo today.
