What is ROAS?
Return on ad spend (ROAS) is a financial metric used to measure the efficiency of an advertising campaign. It is commonly used in ecommerce to evaluate the effectiveness of different marketing channels and campaigns.
How do you calculate ROAS?
ROAS is calculated by dividing the revenue generated from an advertising campaign by the cost of the campaign. A high ROAS means that the campaign was successful in generating a good return on investment, while a low ROAS indicates that the campaign was not as effective in driving sales.
To calculate ROAS, you will need to first determine the total cost of the advertising campaign. This includes any fees paid to advertising platforms, such as Google Ads or Facebook Ads, as well as any costs associated with creating and distributing ads, such as design and production costs.
Next, you will need to determine the total revenue generated from the campaign. This can be calculated by adding up the total sales made during the campaign period and subtracting any returns or refunds. It's important to note that the revenue used in the ROAS calculation should only include revenue directly attributed to the advertising campaign. For example, if you are running a Facebook ad campaign to promote a new product, the revenue used in the ROAS calculation should only include sales of that specific product that can be directly attributed to the Facebook ad campaign.
Once you have determined the total cost and revenue of the campaign, you can calculate ROAS by dividing the revenue by the cost. For example, if you spent $500 on an advertising campaign and generated $2,000 in revenue, your ROAS would be 4.0 ($2,000 / $500). This means that for every $1 you spent on the campaign, you generated $4 in revenue.
What should be taken into account with ROAS interpretation?
It's important to keep in mind that ROAS is a relative metric, and what is considered a good ROAS will depend on the specific business and industry. For example, a business selling high-end luxury goods may have a lower ROAS than a business selling low-cost items, as the cost of goods sold for the luxury goods business is likely to be higher.
There are a few other things to consider when interpreting ROAS:
- Campaign goals: It's important to consider the specific goals of the advertising campaign when evaluating ROAS. For example, if the goal of the campaign was to generate brand awareness rather than direct sales, a lower ROAS may still be considered successful if it helped to drive traffic to the online store and build the brand's reputation.
- Margins: The profit margins of a business will also impact the ROAS. For example, if a business has low profit margins, it may need a higher ROAS to be considered successful.
- Comparison to industry benchmarks: Comparing the ROAS of a campaign to industry benchmarks can help to give context and provide a point of reference.
Most importantly, it must be understood that different channels use different marketing attribution models. Therefore channel specific ROAS data shouldn’t be mixed with blended ROAS, combining data from all channels.
Facebooks and Google’s attribution models
Marketing attribution models for the two most common channels are different.
Facebook Ads uses a last-click attribution model, which means that it assigns credit for a conversion to the last marketing touchpoint that a user interacted with before converting. This means that if a user clicks on a Facebook ad and then converts on the business's website, the conversion will be attributed to the Facebook Ad.
Google model uses a data-driven attribution model, which uses machine learning to analyze the data from all of a user's interactions with a business's marketing efforts and assign credit based on the relative impact of each touchpoint. This means that it can take into account the role that each marketing touchpoint played in the user's decision to convert, rather than simply attributing credit to the last touchpoint. Meaning the same Shopify store sales transaction can be calculated to attribute Facebook Ads and Google Ads ROAS.
How ROAS calculation works in Ellis
Tracking & calculating ROAS can be quite a time-consuming and tedious task to do on a daily basis, therefore many have found it beneficial to outsource it to marketing agency or use external tooling like Woolman’s Ellis data platform. Ellis has built-in integrations for gathering and following channel-specific ROAS. With Ellis, D2C merchants can simplify tracking relevant KPIs, combining data from different advertising platforms and sales from Shopify stores.
In summary, ROAS is a useful metric for evaluating the efficiency of an advertising campaigns and can help businesses to identify which marketing channels and campaigns are most effective in driving sales and generating a good return on investment.
Want to learn how Ellis can help you?