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Calculating return on advertising spend (ROAS) is a critical marketing metric. When marketers know the ROAS across individual paid ad campaigns, they can quickly adjust or abandon efforts that are delivering low returns on ad spend — and expand or extend the campaigns providing a good ROAS.
Understanding how to calculate the return on ad spend is also important for helping a business determine its true customer acquisition cost (CAC). You’ll learn more about the relationship between ROAS and CAC later in this piece. Also, you’ll get an overview of different tools for calculating ROAS and tips for how to improve your ROAS.
Let’s kick things off with a quick definition of ROAS.
Simply put, a return on ad spend is the amount of money earned by an advertising or marketing campaign matched against the amount of money spent on that campaign.
If math isn’t your strong suit, don’t worry: calculating your return on ad spend is easier than you might think. You simply take the amount of revenue generated by your ad campaign and divide it by the amount spent on the campaign to produce a ratio or percentage. The higher the ratio or percentage, the more successful the campaign!
Here is a simple ROAS calculation example: A company spends $5,000 on an ad campaign in one month. The campaign generates $25,000 in revenue during that month. To calculate ROAS, the company divides the $25,000 in revenue by its $5,000 in ad spend, and the result is $5.
In short, every dollar the company invested in ad spend for this one-month campaign generated $5 in revenue. That’s a return on investment (ROI) of 500% — or a ratio of 5:1. (Nice!)
You can easily find calculator tools online that can help you calculate ROAS. There’s even a ROAS formula for Google Ads that you can utilize for your digital campaigns.
You can also turn to your Microsoft Excel software program for the task of calculating ROAS. Check out this resource on HubSpot for a step-by-step guide on how to set up and use the following ROAS formula in Excel: (sales revenue - marketing cost) / marketing cost = ROI.
Knowing your ROAS is valuable, but it doesn’t indicate if your ad program is profitable or what your profit margins might be. For that, you must calculate the break-even ROAS.
You can find calculator tools online for handling this process as well. But the break-even ROAS formula is simple to work out by hand, as long as you know your average profit margin as a percentage.
The break-even ROAS formula looks like this:
break-even ROAS = 1 / average profit margin %
So, if you have an average profit margin of 70%, the break-even ROAS is 1 / 70%. That’s 1.4, or 140%. If your ROAS falls below this figure, your ad program is losing money.
Businesses often stumble when calculating return on ad spend (ROAS), leading to skewed results and misguided decisions. One frequent misstep is overlooking the full cost of a campaign. Many companies only consider the direct ad spend, neglecting vital expenses like creative development, agency fees, and platform charges. This oversight inflates ROAS, painting a misleading picture of profitability. To remedy this, businesses must meticulously track and include all campaign-related costs in their calculations.
Another challenge lies in accurately attributing conversions. Today's complex marketing landscape involves multiple touchpoints before a purchase. Relying solely on the final click undervalues the impact of earlier interactions, like social media or email. Adopting a multi-touch attribution model offers a more holistic view of how different channels contribute to sales, guiding smarter strategy adjustments.
As you’ve no doubt gathered by now, using ROAS as a marketing metric can provide valuable insight into the return that you’re generating for every dollar you spend on ads.
Importantly, ROAS analysis can help you identify poorly performing advertising and marketing campaigns, so you can move swiftly to switch up tactics and get on the path to achieving better outcomes. A good ROAS can also help you identify ad campaigns that perform well, allowing you to replicate the successful elements of those efforts in future campaigns.
Knowing how to calculate your return on ad spend and keeping the target ROAS number in focus can help you plan and optimize your digital ad campaigns, enhance your Google Ads bidding strategies for various campaign types, and develop more effective marketing strategies, too.
What is a good ROAS? Generally speaking, if your ads are producing enough revenue to cover your campaign costs, that’s a positive sign. If they’re not, you’ll want to figure out how to improve ROAS. And even if your ads are generating healthy revenue, it never hurts to aim higher — provided you don’t overextend your resources in the quest for a small bump in revenue.
In either case, the following strategies can help you enhance your ROAS:
One of the easiest ways to improve ROAS is by optimizing another key marketing metric: cost-per-click or CPC. Optimizing CPC typically means reducing CPC — and one way to do that is by making sure your ads feature compelling content, so you get more clicks. For example, if your CPC is $10 and you can double your click-through rate by using more relevant content, you could lower your CPC to $5.
Testing new keyword combinations, using long-tail keywords (longer, more specific phrases), and including negative keywords (to prevent your ads from appearing in search queries that are irrelevant and waste your ad spend) can also help lower your CPC. You can reduce costs further by avoiding highly competitive keywords and focusing on lowering your keyword bids.
Conversion rate optimization (CRO) is another way to improve ROAS. There are multiple touchpoints between your website landing page and where you measure a conversion, whether that’s a sale, a newsletter sign-up, or a demo booking. CRO focuses on making the customer journey between those touchpoints as seamless as possible and helps reduce friction so that your ad results in a customer rather than just a click-through.
CRO best practices include:
Getting your customers to buy more when they order online is another way to improve ROAS. If your average order value (AOV) is higher, the return on ad spend should be higher, too. To calculate AOV, take the total revenue from all sales and divide it by the total number of orders.
Total revenue from all sales ÷ total number of orders = AOV
You can boost your AOV by:
E-commerce sites can also increase AOV by emphasizing customer service. Make it easy for customers to contact you by offering a full array of contact options, including phone and email support. Companies that excel at customer service — and boosting their AOV — also typically offer a 24/7 live chat option.
It’s worthwhile double-checking exactly how your revenue is being attributed. After all, if your ad campaign is generating sales, you want to make sure marketing is getting full credit for every one of those sales.
Many factors influence a customer's decision to purchase, including multiple touchpoints across various marketing channels. A first-touch attribution model might overvalue initial interactions, while a last-touch model might undervalue the impact of earlier touchpoints. To gain a more comprehensive understanding of your marketing performance, consider implementing a multi-touch attribution model. This approach distributes credit across all touchpoints involved in the customer journey (including offline touches like phone calls), providing a more accurate picture of each channel's contribution.
Whether you use first-touch, last touch, or something in between, you should review your attribution model regularly.
To improve ROAS, you want to reduce your cost of acquiring customers. Marketing automation can help on this front by streamlining marketing efforts, improving lead generation, email targeting, and more. You can also reduce CAC by testing and improving your ads so that they include effective content that focuses only on the customers you want to reach or retargets existing customers.
By comparing two versions of an ad or landing page, marketers can make informed decisions about which elements resonate most with their audience. This iterative process involves creating multiple variations with subtle differences, such as headline tweaks, image changes, or call-to-action variations. By randomly splitting your audience, you can measure the performance of each version and determine which yields better results.
A/B testing goes beyond simply optimizing ad copy. It can be applied to various campaign elements, including landing page layouts, email subject lines, and even website design. By systematically testing different approaches, you can uncover hidden opportunities to improve conversion rates and overall campaign effectiveness. Remember, A/B testing is an ongoing process. Continuously analyzing results and iterating on your campaigns is essential for achieving optimal performance.
Precise audience targeting is a cornerstone of successful advertising. Delivering your message to the right people significantly increases the likelihood of conversions and boosts your ROAS. By carefully defining and refining your target audience, you can optimize your ad spend and maximize returns.
Use a combination of demographics, interests, behaviors, and firmographic data to create detailed audience segments. Utilize advanced targeting options offered by advertising platforms to reach highly specific groups. Continuously analyze campaign performance to identify which audience segments are driving the best results. This data-driven approach allows you to refine your targeting over time, ensuring that your ads are reaching the most receptive audience. Additionally, explore lookalike audiences (we’ll get to them more below!) to expand your reach while maintaining a high level of relevance.
Retargeting is a powerful tool for re-engaging users who have shown interest in your brand but haven't converted yet. By serving targeted ads to these warm leads, you can effectively nurture them through the sales funnel. These campaigns remind potential customers of your products or services, keeping your brand top-of-mind. This increased visibility often translates to higher conversion rates, ultimately boosting your overall ROAS. Tailoring your ad messaging to reflect their previous interactions can further enhance the effectiveness of your retargeting efforts.
Pro tip: you can take your retargeting strategy to the next level by using phone conversation data. For example, you can retarget a caller with ads for the products or services they mentioned on the phone, giving them a nudge to complete their purchase.
Expanding your customer base while maintaining high conversion rates is a challenge many marketers face. Creating lookalike audiences offers a solution. By identifying shared characteristics among your best customers, you can build targeted audiences of similar individuals. These lookalike audiences are more likely to convert compared to a general audience, as they exhibit similar behaviors and preferences.
If you use a call tracking solution like Invoca, you can build lookalike audiences based on your most valuable callers, allowing you to replicate your success. This is a powerful strategy, as callers tend to buy more, convert faster, and stay more loyal than online customers.
The visual and textual elements of your ads play a crucial role in capturing audience attention and driving conversions. To optimize your ROAS, invest in creating compelling ad creative that resonates with your target audience. Experiment with different visuals, headlines, and calls to action to identify what works best. Additionally, consider A/B testing various ad variations to gather data-driven insights. By continuously refining your ad creative, you can improve click-through rates, increase engagement, and ultimately boost your return on ad spend.
In truth, there’s more to having a “good” ROAS than just making sure your ad spend is covered. Your actual return on ad spend will depend on the type of business you operate, what you sell, who you sell it to, who your competition is, and which ad platform you’re using.
A good average ROAS is considered to be around 3:1 or 4:1, or a 300% or 400% return on ad investment. However, ads that run on the Google platform might generate three or four times that ROAS.
ROAS and ROI are not the same metrics. Here’s a quick look at how they’re different:
Both metrics measure profitability by viewing costs against revenue; however, think of ROI as measuring the success of your entire investment in marketing and ROAS as measuring the success of your ad or ads.
One tool you may already be using is Invoca for marketing. Invoca’s AI-powered conversation intelligence platform allows you to capture attribution data from phone conversations and combines it with your other martech tools to fine-tune your advertising and marketing campaigns and maximize ROAS.
How can you improve ad campaigns with call tracking? Call tracking empowers your marketing team with valuable conversational insights that allow you to personalize the customer journey and redirect ad copy to appeal to more customers. These insights are contained in transcripts and actual call recordings. Invoca’s AI capabilities also help marketers identify trends in real time.
Invoca’s solution can be used to track online and offline conversions in Google Ads and other commonly used ad platforms. It also provides marketing and sales teams with true performance measurement by enabling better attribution for every customer touchpoint and action in the call center.
By helping to improve your ad campaigns and delivering full marketing attribution for every media channel you use, Invoca can help you calculate your return on ad spend more confidently and accurately — and understand how to improve it.
Want to learn more ways to improve your ROAS with Invoca? Check out these resources:
Request your personal demo of Invoca to learn how you can lower your CPA while improving marketing campaign performance.
