The ROAS calculation is a metric used to determine the success of your advertising campaigns. Let’s look at how to calculate ROAS, why it is essential, and how it impacts your business goals.
Have you ever wondered what ROAS is and why many businesses ask for its measurement on their reports?
It is simple, ROAS stands for Return On Ad Spend, but is your business going to take advantage of this measurement? That is what we are going to resolve today!
We are going to discover the secrets behind the ROAS calculation. Then, I will provide some hacks to calculate this metric more easily and explain the differences between similar metrics that we hear every day.
Let’s hack the mysterious ROAS and its calculation.
How to calculate ROAS
No worries, it is not that hard. It is math! But not advanced; you need two factors to calculate the return on advertising spend.
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Your net profits from your sales. (Only those that you know how to attribute to your advertising assets)
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And the budget you spent on advertising.
We will dive deeper into the formula, use cases, tricks, hacks, and many more. So keep reading; you’ll discover great stuff about the ROAS.
I’ll give you some ideas about when it is worth using this metric and what a good ROAS should look like, depending on the e-commerce platform you are using for your business.
First, we are going to focus on our business goals. The way you set your objectives is how you determine the advertising strategy’s success.
With well-established goals you will see how every effort is going to traduce them in sales.
ROAS and Marketing goals
Marketing is the process of taking an individual, a brand, or a business from point A to point Z, moving them from being a suspect, someone who might be in your market to a prospect, to an engaged individual, to a customer, and beyond.
Consumers are on a journey, and the key to success is to understand and manage that journey.
But today, we’re going to focus on point Z, where a purchase occurs.
This is when we can determine the return of advertising spend, better known as ROAS.
The ROAS is a metric that is used to measure the effectiveness of a campaign.
So this can be considered as a good performance indicator to compare revenue, determine the quality and quantity of efforts that your advertising team has done in a month, and compare to previous periods.
The ROAS corresponds only to that ratio calculated by dividing:
Total of earnings during a specific time range into / the number of ads spent.
This metric (ROAS) is specific to calculating a campaign’s performance that aims to sell your product to your customers.
If you are tracking your sales during a specific time frame and you know how to attribute them to your ads, that means that you have half the information needed.
But what about the other half? That’s the total revenue from those sales.
When to calculate ROAS
First, you have to ensure that you and your business can access the data and the two factors for the ROAS calculation.
I just wanted to point that out because, on several occasions, this metric was often required by the marketing team of one of the clients I worked with as a digital marketing analyst. My answer was always “I’m sorry, I can’t”.
But why was I telling them no… (I’m sorry, I can’t)
Easy, because none of their active campaigns aimed to lead consumers to e-commerce, which was the only place they could collect data. And also, because the company sales reports were not reachable.
The saddest part of the story was that they didn’t have an owned e-commerce, and it is common when it is a consumer goods or a large brand. Most of their negotiations with retailers include placement on their websites and apps. But my client could not even ask for data from the online retailers the brand had negotiations with.
What is the point of this story?
First, they had a terrible understanding of the essential metrics for the business; my client’s team members seemed wholly disconnected from the digital marketing environment and its operation.
At that time, part of my job was to evangelize the Digital Marketing metrics across the company.
Secondly, their paid media strategy on digital was oriented to strategies focused on the wider part of the funnel, also known as the upper funnel. If you, like this team, are also focused on gaining relevance or reaching more audiences, you don’t need this metric at all!
Keep in mind that you can measure different indicators to determine the success of your business.
You can set your gauges depending on your business goals, communication, and your ads’ objective. Then, calculate them using revenues, investments, profits, and then we can justify and analyze our efforts deeper with meaningful data.
Of course, the metrics depend on the strategy, so don’t force yourself and the teams you work with to get analyses or indicators that you can’t even calculate.
So, how do you know what the right metric to succeed in digital marketing is? The answer is in the development of the performance funnel.
The Advertising funnel and the ROAS
This is a performance funnel that is designed to track a relationship from start to finish within a marketing channel.
If you start at the top of the marketing funnel, keep in mind that it begins with the target market you want to develop.
It shows the size of the total market, and using social monitoring tools, estimates the likely size of the social market.
You can use a Porter Metrics connector to read this type of metrics, as well. Try our new Facebook Competitors’ connector now!
Then you can go forward with the consumer journey and start using other objectives to incentivize the purchase of your products.. Here is when you can start measuring ROAS
Let’s get back on track…
With the ROAS, you will determine that the more impact your ads have, the more revenue you’ll get for each dollar spent. So the higher your ROAS is, the better your performance is.
The components of the ROAS should correspond only to the direct ads that were part of a campaign with a straightforward sale objective. And of course, the other piece, the revenue.
In other words, if you want to calculate ROAS, is probably because you are running an e-commerce campaign.
So, let’s dive deeper into the formula for how marketers calculate the ROAS.
This is the checklist to calculate this metric.
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Revenue: The money you receive as a consequence of the sales in your e-commerce
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Total ad spend: The money you spent on your banners, Google Ads campaigns, SEM, Facebook Ads, Amazon Ads, etcetera.
What is the ROAS formula?
As I mentioned earlier, this formula is straightforward:
You simply divide your business revenue by the amount you spent on advertising during a specific time.
ROAS = Total revenue / Total ad spend
For example, if your total sales are worth (Two thousand dollars) $2,000
and you spent (four hundred dollars) $400 on advertising, your ROAS would be 5.
2,000 /400
Equals = 5.
So for every dollar you spent on advertising, you have earned $5 back.
It is time for a great hack!
Create your own ROAS CALCULATOR!
ROAS CALCULATOR
By using Google Data Studio or a Data Visualization tool, you can create and automate the report of this metric, even using an Excel worksheet. Let me show you how:
ROAS calculator in Google Spreadsheets or Excel
First, I’m going to teach you how to Calculate the ROAS metric using Google Spreadsheets.
Then I’m going to show you how to visualize this number in a google data studio dashboard.
I’ve created this spreadsheet to show you what columns we are going to use and then you will pull these numbers and visualize them on our dashboard.
You can access the “ROAS Calculator” document here, make a copy and keep it!
I highly recommend you to include a column with the date because sometimes we are comparing different periods.
You are free to add your results by month, and then you can use filters to visualize your information in a graph.
Just be careful with the format of the date, it should have the same format and structure.
You can split by day, week, month, or year… depending on how you measure the impact of your campaigns. For this example, I’m only using the year.
Then, place in the next column your publisher list. A publisher could be a social network or a platform such as Google ads or Amazon ads. In other words, whatever media you have spent money on. For this example, I have Facebook, Instagram, Amazon ads, Google ads, and a programmatic buying platform, Xaxis.
Make sure you have listed all the publishers and platforms.
On column C we are going to list the advertising cost, specific to each publisher. This is the amount of money we have spent on a given time range.
The revenue which you can see on Column D is the total amount of money you earned from the sales.
Column E is where the formula we just learnt is going to live.
Let’s begin by typing equals = and select the column of total revenue, in this case, D, then type / (forward slash) to divide this number by the total cost of your ads on each channel.
=D2/C2
=Revenue/ Advertising Cost
And lo and behold, your calculation is done!
ROAS calculator in Google Data Studio
Now it is time to report to our teams. If we have this tracking, we can provide a number and start building a benchmark by platform.
Remember, the ROAS is not the only metric or indicator that defines your digital marketing strategy.
But of course, it is a solid indicator of the scalability of a brand and its products.
Google Data Studio is free, and it is a good visualization tool.
If you want to discover what you can do with this platform, I recommend taking our Google Data Studio free course. You can also join our community here to receive templates and more tutorials.
First, go to https://datastudio.google.com/ and create a new report. Now import your Google spreadsheet as a data source and play with the fields.
For instance, I will visualize the ROAS in Google Data Studio, but it might be somewhat tricky. So sometimes, you will see it doesn’t calculate correctly.
Can you see the error?
Look twice.
Yes! It is an addition.
What I do to fix it is to create a calculation.
Go to “add metric”, select “create field”, and type SUM to place the sum of the revenue divided by the SUM of total ads spent.
Add a scorecard, it will look nicer in your dashboards.
In the next example, I’m going to share a template for you to save even more time, just import the logo of your business or brand and start reporting like a pro with the free ROAS template for Google Ads and Facebook Ads powered by Porter Metrics
Now that we know how to do it manually, it is time to save time and automate it.
We love to hack tedious tasks!
Google Ads ROAS white label report
The Google Ads ROAS is even easier to display in a dashboard.
To make your life easier when analyzing ROAS. I highly recommend you download a white label report; considering it is your first experience creating this type of analysis, you must look professional because this report is probably for a director-level meeting.
Try using the template I just shared for you to save even more time. Just import the logo of your business or brand and start reporting like a pro with the ROAS template powered by Porter Metrics. The link is in the description box of this video.
Just follow the steps and once it’s yours, click on “use template” and “copy report”
At the top of this template, we are using scorecards to visualize the metrics we should focus on when creating these types of reports.
For example, the advertising cost. Is a metric you should place in a visible part of your report.
To report the ROAS, you must show how much our spending is overall. Then, we can see the cost by specific campaigns, consider a table to visualize this type of information.
We also can establish a parameter that indicates how the ROAS is performing.
In this case, I’m using a table resource, and when I go to the Style tab I can select the format and select show number go, down here and select show target and indicate a reasonable ROAS I’m gonna use 1.7 what is a Good ROAS for this specific account.
Well now let’s see how this dashboard looks while I jump into the next page…
The Facebook ROAS
The return on advertising spend for Facebook Ads can be calculated based on the value of the conversions recorded by the Facebook Pixel on your website. This is how you are going to attribute your sales to your ads.
Pixels need to be on your website and on your relevant conversion event, which could be “Donate Now” or “Buy Now buttons”. Take into consideration that there should be no tracking gap and sometimes it is necessary that you manually cross-match your leads/sales with your FB data.
Please always check pixels are pulling properly your data in your FB Ads Manager.
Then the process is a piece of cake!
You have to do the same. Copy the report and start pulling the information from your Facebook Ads account. It is automatic.
The ROAS (Return on Ad Spend) measures how much revenue is generated for every dollar, peso, euro, etcetera you spent. I really feel the Facebook ROAS is an ally for all of us as marketers. This platform shows us if our ads are working and if they are performing as expected in terms of sales in our conversion funnel. We can see directly from the platform the results and set benchmarks or parameters to determine a good return on investment.
When looking at Facebook ads results, marketers and big clients tend to focus on landing page views and jump directly to read sales, but we also need to know if the sales we are generating are producing good results relative to our spending.
You can gauge and adapt a target ROAS using the “bar” feature on a table, if you want to see how I fixed it, watch this tutorial.
There is another question that comes to our minds when measuring ROAS… To determine a good one for your company or business, and here is when you need to think about the following:
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Your industry
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Your profit margins
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Your average cost-per-click (CPC)
Once you figure out these details, you can solve this question by uncovering the optimum dollar amount for your business.
What is a good ROAS?
There is only one thing you need to know. The ROAS varies between advertising channels and industry verticals. Consider many factors such as product pricing, profit margins and business maturity influence.
Thanks for asking but I’m not a witch or a magician, nevertheless you can set your own ROAS gauges depending on your industry, category or business.
If you are an analyst you probably are a researcher too, so don’t hesitate to take a look at the recent studies or benchmarks of your industry before considering the ROAS as one of your key performance indicators.
As a researcher, I love to find meaningful data such as studies or benchmarks and I found this one made by Sidecar. Their latest study (2021) shows the following benchmarks by platform.
It might be helpful to understand this metric when you’re not too familiar with your business or is your first time reporting it:
According to its research, these are the average retail ROAS metrics for each one:
Google paid search ROAS: 13.76 (AVG across industries)
Facebook advertising ROAS: 10.68 (AVG across industries)
Instagram Advertising ROAS: 8.83 (AVG across industries)
Amazon advertising ROAS: 7.95 (AVG across industries)
So, here it is not only about ROAS but how you read it.
Let’s understand the difference between three similar indicators
The ROI
The ROMI
And the ROAS
What is ROI, and what is the difference between the ROAS
KPIs, like ROI and profits in other business measures, show efficiency. How efficiently is our marketing investment making us profit and revenue? Together they provide us with the key metric we need to justify our marketing strategy.
Let’s imagine we are looking for the sales records of a company, and presenting an annual report to our teams.
Different departments have to deliver information related to the spent and of course, the sales department will deliver information about the total sales annually.
For this matter, the accountants also ask for human resources data, dispatch data, Marketing data, and several data sources to deliver a unified report with one of the most important metrics printed on the first page, the ROI (Return on investment).
The ROI (Return of Investment) is calculated by dividing the total earnings or (revenue) by the total spent.
ROI = Net Profit (divided by) Total Investment (times one hundred) *100
What is ROMI, and what is the difference between the ROAS
The ROMI, return on marketing investment, is different, and I like this one is focused on the different actions that a marketing department can execute in a period. Such as events and activations, influencer marketing, tv commercials, Social media ads, and all the efforts needed to communicate our great releases and keep the relevance and equity of a brand.
Understanding how to calculate the return on marketing investment allows you to do lots of interesting things. For example, one of the things you can do is answer the kind of rhetorical question that marketing teams ask: Is paying an excessive amount of money to a famous influencer or celebrity to create a post on social media worth it?
The calculation is the same: Revenue by the spent on Marketing efforts.
Can you see how the basis of this calculation is the same, but the components are different?
So what is the difference with the ROAS
As I mentioned earlier, this calculation is specific to every effort focused on leading conversion and purchases to an e-commerce site.
Whether you just opened your e-commerce on Shopify or Amazon, the ROAS metric is fundamental to understanding how your advertising strategy is performing.
You can even determine the success of our ads by gauging this indicator week over week or when you replace a content piece to communicate a great promo on your e-commerce site.
But if you are an analytics person, this is easiest for you. Check this out!
ROAS is a ratio that helps you measure the performance of the campaign based on money spent on ads. Agencies and marketers can easily track this and be more creative to adapt the content strategy and their ads to impact the ROAS ratio.
ROMI it is also a ratio, I’m sure you figured it out when you saw the ROMI formula:
Revenue / the spent on Marketing efforts. But remember, ONLY marketing efforts
ROI is a percentage and is a higher-level look at the success of marketing efforts, remember the accountants?
Usually, the ROI is that measure used by managers to base business decisions on, it is harder to track, you will require access to the full results of the business overall to see how a campaign affected the business across the board.
I don’t want you to face situations where clients are asking social media analysts to bring them the ROI, that’s just illogical!
If you have to face a funny and sad situation with your clients just like myself, do not hesitate to ask them for the data you need to calculate, you will see that the majority of times your clients don’t even know how much the profits of the company are. So they can never know how to activate an impactful campaign to increase sales.
