One of the biggest challenges that marketers and advertisers face relates to proving the return on investment for campaigns they run and how these align with their business goals. Proving marketing ROI is the second biggest global challenge faced by marketers. When running an ad campaign, Return on Ad Spend (ROAS) happens to be a vital metric that you have to calculate to prove the ROI of the campaign.
Businesses use ROAS to calculate the effectiveness of an ad campaign since it is one of the core metrics that helps advertisers prove ROI.
Understanding, calculating, and improving ROAS are the primary tasks that you have to perform if you spend money on PPC ads. This in-depth guide covers everything you need to know about ROAS, how to calculate ROAS, and how to improve it.
What is ROAS (Return on Ad Spend)?
Businesses use Return on Ad Spend – or ROAS – to measure the return on the money spent on advertising.
For example, let’s say you spend $100 on advertising, and your campaign results in $150 worth of sales. Your ROAS will be $1.5. In other words, you earn $1.5 for every $1 you spend on advertising; a $0.5 profit.
ROAS helps you measure the effectiveness of your ad campaigns and lets you identify the best ad networks, ad groups, and advertising methods. Higher ROAS is desirable as it means you are earning more per dollar investment.
Why Return on Ad Spend Matters
ROAS is an important metric that provides extensive information about the profitability of your PPC campaigns and advertising networks. You can measure the ROAS of your entire business, individual ad campaigns, ad groups, ad networks, or even individual ads.
ROAS is a better measure of return compared to CPA (Cost Per Action) as it focuses on revenue generated and not only on conversions. CPA is one of the most widely used metrics – especially in the affiliate industry – to measure the return on investment. However, conversions are a much less precise metric.
ROAS, on the other hand, uses revenue generated by the advertisement which also includes recurring revenue. Thus, ROAS includes customer lifetime value as well, making it a more robust metric. For example, let’s say a visitor clicks your ad and converts. They later purchase a product and then after two days, purchase another product. ROAS credits these sales to ad revenue, which more precisely shows the value of the converted client, especially over time.
In addition, ROAS accounts for all types of advertising costs – not just the campaign budget. It includes administrative costs, vendor costs, ad partner or agency costs, affiliate commissions, costs of tools, and other direct or indirect costs associated with running and managing ads.
This makes ROAS an effective metric that gives you a quick and instant overview of your running PPC campaigns, allowing you to identify the best-performing ad campaigns based on revenue (as opposed to an arbitrary metric).
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How to Calculate ROAS
Calculating ROAS is like figuring out how much money you make for every dollar you spend on ads. If you spend $1,000 on ads and those ads bring in $2,000 in revenue, your ROAS is 200%. The higher the percentage, the more successful your ads are at making money compared to what you spent on them.
Return on Ads Spend Formula
ROAS = Net Revenue generated by ads/Ad cost
You need two variables to calculate ROAS using this formula:
- Revenue generated by ad
- Cost of running the ad
Let’s see how you can find these two variables.
1. Revenue Generated by Ads
Finding revenue generated by ads can prove difficult depending on your business model, ad network, attribution model, conversion treatment, and other variables. Calculating revenue generated by specific ads or ad campaigns is a whole different story as it involves deep campaign and ad group calculations.
If you run an e-commerce store, calculating revenue becomes easier as you aren’t dealing with conversions. You work directly with sales, and this makes revenue calculation straightforward. However, if you are in a B2B sector where you generate leads, and then require time to close those leads, calculating the revenue generated by ads gets increasingly complex. Businesses that focus on conversions must consider post-conversion metrics to calculate the revenue generated by ads.
Leading ad networks like Google Ads and Facebook Ads allow you to calculate ROAS easily irrespective of your business model. Google Ads, for example, lets you create conversion values in your Google Ads account for automatic calculation of revenue generated by ads and ROAS.
Conversion value is a numerical value used to determine the impact of a conversion on your business. Not all conversions have a similar impact on your business and revenue as some carry more value and others less. By setting conversion values in Google Ads, you can identify high-value conversions that result in a high ROAS.
You can assign the same value to all the conversions or dynamic transaction-specific values in Google Ads.
Follow these steps to assign conversion values:
Step #1: Sign in to Google Ads
Click here to sign in to your Google Ads account to get started.
Step #2: Measurement
Once you are logged in, click Tools & Settings > Measurement > Conversions:
Step #3: Click Add
Click the + sign to add a conversion value:
Step #4: Conversion Tracking
Select an appropriate conversion tracking for your business. In most cases, it is your website where the conversion takes place. You can also track conversions on apps and phone calls. Or, you can import data from Google Analytics or any other source.Click Website to start tracking conversions for your website:
Step #5: Add Conversion Value
You’ll be asked to select a category for your conversion. Select an appropriate category from the dropdown menu:
It includes both sales and leads categories to make conversion tracking easier.
You’ll then be asked to set a value for your conversion. You can use the same value for each conversion or different values:
You’ll have to assign different values if you sell multiple products. In this case, assign a default value and the rest will be handled by the tracking code:
Step #6: Attribution Model
An important part of ROAS is your attribution model. Move towards the end to select an appropriate attribution model. The last click is the default model that’s selected. You can change it to first click, linear, time decay, or position-based:
Once you are done, click Create and Continue.
Step #7: Add the Tag
You need to add the conversion value code on your website. You can install the tag yourself, email it to your developer, or use Google Tag Manager:
You’ll need to add global site tag and event snippets to make conversion tracking work for your website. Here is a quick guide on how to do it.
Once you have successfully set up the tag and conversion values, you’ll be able to conversions, cost/conversions, conversation rate, and ROAS in the Google Ads account:
This makes it super simple to identify the best campaigns based on ROAS. You can then tweak your campaigns accordingly and increase the budget for campaigns and ad groups with higher ROAS.
Google Ads lets you analyze ROAS for ads, ad groups, and campaigns. You can check specific details at the ad level and see what’s working for you.
Static Vs. Dynamic Conversion Values
Calculating and tracking ROAS for your Google ad campaigns requires that you set appropriate conversion values. These values are used for ROAS calculation. Google Ads lets you add two types of conversion values:
- Static values that remain the same for all the conversions
- Dynamic values that are different for each conversion.
You need to set up conversion values correctly to calculate accurate ROAS. Setting an incorrect conversion value here or in the tag will result in an appreciated or depreciated ROAS without you knowing about it.
It is essential to understand what you are doing and how to set up these values correctly.
Static conversion values are used when all the conversions have the same value. This only happens for lead generation where you don’t sell anything or there isn’t a shopping cart. For example, if you are sending traffic to a landing page where visitors have to fill in a form and convert. In this case, you’ll use a static conversion value because all the visitors have the same conversion value.
Dynamic values are transaction-specific and are used in all the cases where you sell products or generate leads that have different prices and values. For example, shopping cart value could vary depending on the product variations selected by the customers in an e-commerce store. This is a case where you’ll select dynamic values.
In the case of lead generation or in cases where identifying a specific conversion value isn’t possible, things get complicated. For example, if you are generating leads for your B2B marketing agency via Google Ads, you’ll not have any idea of how each lead converts. You could end up having a $5K project with one client and a $70K project with another client.
In these cases, assigning specific conversion values gets complicated. If you have a sophisticated sales process and you are using a powerful CRM (Customer Relationship Management) tool, you can assign an average conversion value to leads based on historical data and put it in the static value section.
2. Cost of Running Ads
Setting up conversion values in Google Ads provides you with ROAS based on the cost of running ads. This gives you a better understanding of how to channel your advertising spend. But this cost only includes ad-related costs that aren’t documented with Google Ads.
When you run an ad, it can involve many costs, including:
- Vendor, agency, and partner costs
- Cost of tools
- Miscellaneous costs
To make ROAS reliable and accurate, you will also need to adjust these costs. For example, if you have a team of three employees working in the advertising team who manage and run ad campaigns, you have to adjust their salaries as well.
Similarly, you must account for other costs associated with running ads.
Let’s take an example.
Your business has a ROAS of 5 – quite healthy. This means you earn $5 for every single dollar you spend on ads. However, you haven’t adjusted ROAS for the advertising team salary which costs you $5000 per month. Your business invested $5000 in ads a month and earned $25,000. The total revenue earned from advertising turns out to be $20,000. However, the actual net revenue is $15K ($20,000 – $5000).
Reporting $20K as advertising revenue in financial reports will lead to problems as it is assumed that it accounts for all the costs of running ads (from a financial viewpoint).
This is a big concern from the reporting viewpoint.
You must account for these additional costs of running ads to adjust ROAS so it is more realistic and effective. Not adding these costs reduces the efficacy of ROAS significantly.
However, these additional expenses aren’t considered by most businesses when calculating ROAS. You can stick with the ROAS from your Google Ads account. It all comes down to your financial strategy. However, it is recommended to add these costs to increase the effectiveness and reliability of ROAS.
How to do it?
It’s simple. You must calculate an adjusted ROAS based on ROAS data from your ad account. Copy data from an Excel spreadsheet, add additional costs, and you’ll have an adjusted, more authentic ROAS.
This will require additional, manual work on your end but it is worth the effort. Your ROAS will make more sense and it will show you the actual net revenue you are making from running ads.
Click Fraud Adjustment
PPC click fraud is often an overlooked phenomenon that businesses and advertisers don’t consider when calculating ROAS. Fraudulent clicks ruin your ROAS and can severely skew your metrics. When 15% of all PPC clicks are fraud, you have to take preventive measures to keep your ROAS safe from PPC click fraud.
ROAS depends on the cost of running ads. When you receive many fraudulent clicks for a specific campaign, the cost of the ads can increase, resulting in a negatively affected ROAS. With PPC (Pay-Per-Click) advertising, Google charges you based on clicks even if you optimized your campaign for ROAS. The charging is based on the impressions or clicks, and both are subject to click fraud.
Google maximizes the CPC for ROAS bidding to increase conversion value to reach your target ROAS. Setting maximum CPC means you pay a high price per click to achieve your ROAS target. This means you will pay for fraudulent clicks too if you aren’t using a click fraud protection tool.
To achieve a realistic ROAS for your campaigns, you must use a PPC click fraud prevention tool. Not only will such a tool help you get a more accurate ROAS ratio, but it can significantly reduce your advertising costs.
Imagine, you are paying an average CPC of $0.75 for an ad campaign and you aren’t using a fraud prevention tool. According to the industry standard, 15% of all clicks you receive are fraudulent. The cost of 100 clicks, in this case, will be $75 and 15 clicks on average will be irrelevant resulting in lower conversions. Reduction in conversions leads to low conversion value, leading to a reduced ROAS.
Not treating for fraudulent clicks impacts ROAS in two ways:
- It reduces conversion value.
- It increases costs.
The impact of click fraud on ROAS is more than you can imagine as it impacts both the variables that are used by Google Ads to calculate ROAS. Here is the formula used in Google Ads:
n the presence of click fraud, the numerator value is reduced, and the denominator value is increased having a significantly higher impact on ROAS.
A Google Ads click fraud detection and prevention tool is a must if you want to get a realistic and reliable ROAS for your campaigns. A click fraud prevention tool like ClickGUARD doesn’t just make ROAS accurate but it can improve the overall effectiveness of your advertising campaigns.
What is a Good ROAS?
The ROAS output number generated by the ROAS equation shows how much you earn by spending $1. It is essentially a ratio between revenue generation and the cost of the ad. But what indicates a good ROAS? You can generally consider an ROAS above 2 as good and while a ‘good’ ROAS is somewhat industry-dependent, higher is always better.
You can measure ROAS easily if you know how much you are investing in ads and how much you are earning from these ads.
ROAS Explained by ClickGUARD’s CEO – Ralph Perrier
What is the Difference Between ROAS and ROI?
ROAS and ROI operate within the same spheres, but they do have different purposes. Consider the explanation for each to understand the difference:
ROAS refers to Return on Ad Spend. ROAS pertains particularly to how much revenue you generate from a specific ad or ad campaign.
ROI refers to Return on Investment. This investment can go far beyond advertising spend and cares about profit, not revenue. These investments are not limited to ad spend and can be any part of any pipeline in your business that plays a part in generating eventual profit.
Start Increasing Your ROAS With ClickGUARD™
Return on ad spend is a powerful metric that provides you with various bits of useful information about your advertising campaigns. You can channel your advertising budget by investing money into ad campaigns with the highest ROAS.
Calculating ROAS needs special attention. A wrong calculation might get you in trouble as you’ll end up investing money in an underperforming ad campaign. There are two aspects to consider regarding ROAS. First, add all types of ad costs to calculate accurate ROAS. Second, always use a click fraud detection and prevention tool as PPC fraudulent clicks reduce ROAS significantly by increasing ad cost and reducing ad revenue.
Start your trial with ClickGUARD™, a leading click fraud detection and prevention tool, for more accurate ROAS calculations.
What is a good ROAS ratio in Google Ads
ROAS for Google advertisements is industry-dependent and also subject to your product or service. Various products and markets will have different market averages. For example, an average ROAS in a SaaS is around 2.5 to 3.5 – which makes this customer acquisition quite scalable. ROAS for eCommerce is generally lower around 1.5-2.5
What is a Facebook ROAS Benchmark?
The Facebook ad platform is used widely for both building customer acquisition funnels using custom intent and retargeting. But what is an average Facebook ROAS benchmark? Considering a conversion is a purchase or a signup, Facebook’s ROAS is around 1.3 to 1.5.
What is a good ROAS for e-commerce?
Deciding on what constitutes a good ROAS for e-commerce is going to depend on your average ticket value, your profit margin, and your industry. Statistics show that a good ROAS is anything above 1.5 (150% ROAS) since this is considered sustainable.