ROAS, while it sounds like a band from the 80’s, it is actually a really important online marketing metric. Yet, I often come across people and customers who have have never heard of it – even the “experts.”
What is this mystery metric, and why should you zero in and focus on this important metric?
ROAS stands for Return On Ad Spend.
To calculate ROAS, simply take (Revenue Attributed From Campaign / Total Ad Spend) * 100.
Sometimes this is also referred to as ROI, but there are a few distinctions I always clarify with customers and fellow online marketers that are important differences.
Every business has its own cost structure.
Some business models are more complex than others, and when looking at a campaign’s contribution to the bottom line, we see many online marketers add in the ad spend with all of the other associated costs such as sales commissions, COGS, or something similar.
When judging a campaign’s performance, you should only be looking at how much money (aka revenue) is being derived from what is being put in. By adding in the other metrics, you are masking the efficacy (or failure) of a marketing campaign.
Here’s an example how to properly calculate ROAS:
Steve has a plumbing business. Steve spends $100 a week on advertising.
Using an online only promotional code inside his advertising campaigns, Steve sees his advertising customers redeem $375 worth of revenue each month. His ROAS for the week is 375%. Great!
Here’s an example of how to NOT calculate ROAS:
Let’s use Steve the plumber again.
Steve spends the same $100 a week on advertising.
He doesn’t have a trackable promotion code, but he knows he’s spending money on advertising which costs about $75 a week. He also has to pay for some software to manage his PPC campaigns which costs about $10 a month, and just generally “feels” that his sales are improving.
Do you see the difference in calculating ROAS, and not total ROI?
It’s a pretty big difference!
If you are not at least above 100% or break even point, you should be evaluating the purpose of your advertising campaign. In some industries or objectives this might be okay (like a branding only campaign), but for most entrepreneurs and small business owners, you’ll want to see a positive return on revenue as it compares to spending on ads.
ROAS is a great measure to quickly see how a campaign is performing and hold your online marketer accountable.
As discussed in the previous example with Steve’s plumbing company, knowing how to track revenue is almost important as being able to create successful campaigns. When working with a professional firm or consultant like myself, I look at strategies to measure and track progress. each and very step.
This can be achieved in a few different ways, but here are a couple of common ways:
Google Analytics Tracking
Within GA, you can pass along custom parameters and create campaigns with relative ease. This allows you to segment traffic and customers easily. For example, the way you send out your emails might have a custom URL which lets you not only see how many people clicked on your emails and went to your website, but also will show you how that email itself performed. The same can be created with paid acquisition on social media or PPC.
A favorite of ours, you can embed a special coupon code into a campaign to see its direct effect. As long as the customer enters this coupon into checkout or with your sales team, this is an easy way to not only track ROAS, but also track efficacy of the campaign in general.
Use a Spreadsheet
Marketing campaigns can get complex pretty quickly. For the first week you might have an in-store promotion, and then towards the holidays you might want to do a targeted Facebook campaign. Keep track of every marketing campaign you set up, and then also keep track of where you are spending your marketing dollars.
ROAS. It’s important, simple to calculate, and you should be using it to judge all of your online marketing campaigns, whether you are executing them yourself or through a consultant.