Return on Advertising Spend is a crucial metric to measure digital marketing success.
In the world of digital marketing, every dollar spent on advertising should ideally generate a return. But how can businesses evaluate whether their advertising dollars are well-spent? This is where Return on Ad Spend (ROAS) comes in. It is a key metric that helps businesses measure the effectiveness of their advertising campaigns and compare channels against one another. Understanding ROAS allows businesses to make informed decisions on budget allocation, campaign strategy, and overall marketing performance.
What you'll hear: Instagram has a 10% D30 roas.
What it means: If we spend $100 on instagram, on average, these instagram campaign users will spend $10 within 30 days of encountering our company.
How is ROAS used:
ROAS is used by marketers, advertisers, and business owners to evaluate the effectiveness of their digital advertising campaigns across various platforms, such as Google Ads, Facebook, Instagram, or any other paid media. It allows companies to:
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Assess Campaign Performance: By tracking ROAS, businesses can determine which campaigns are performing well and which need adjustments. It serves as a direct indicator of how well advertising dollars are converting into revenue.
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Allocate Budget Wisely: Once businesses have a clear understanding of which campaigns or ad sets are delivering the highest ROAS, they can allocate more resources to the high-performing campaigns, ensuring maximum returns on their advertising budget.
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Optimize Ad Strategy: Marketers can use ROAS data to fine-tune their targeting, creative, bidding strategies, and other aspects of their campaigns to improve performance.
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Set Goals and Expectations: Businesses can set ROAS benchmarks for future campaigns and use historical ROAS data to set expectations for upcoming ad spends.
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Assess Profitability: While ROAS measures revenue, it’s also a helpful indicator of profitability. It’s not just about making sales, but ensuring that the sales generated are worth the cost of advertising. If a company has a ROAS below 100% we know that digital marketing is not a sustainable method to grow. It would require new channels, more efficient campaigns, or a more consistent budget.
How to Calculate Roas
Types of ROAS
ROAS comes in many flavors. Its most common forms break it down by time span and blended/unblended.
Time Span
The most common time span breakdown is D30 roas ("D" stands for Day). This represents the amount of Gross Revenue each marketing dollar produces after 30 days. It is wise to view various windows simultaneously to gauge your monetization and churn over time. While specific windows are industry dependent, common windows are D0 (same day), D7 (one week later), D30 (one month later).
Example: Our D7 is strong but our D30 is below expectations.
Interpretation: Users spend well within their first week of joining, however, user purchasing drops off in the weeks thereafter. Often timespan can represent product-market fit between channels. For instance if Instagram has a better D30 ROAS than Google Search Ads, your product is tends to a younger, app-based audience.
Blended / Unblended
Considering there can be dozens of marketing channels its very common to measure each channel independently. However, this becomes cumbersome when determining future performance or gauging the success of the marketing department as a whole. The solution is to take a "blended" view of ROAS where we simply look at ALL Revenue and divide it by ALL marketing budget.
Example: Our highest channel's D7 ROAS is 200%, but our blended D7 ROAS is 50%.
Interpretation: There is clearly a strongly performing channel, but overall your total marketing budget is much less efficient. Perhaps this means you need to shift budget into the highly performing channel. But be warned not all channels scale well, this high performance often degrades as channel spend increases.
Takeaway
Return on Advertising Spend is a useful metric to compare your user acquisition channels, allocated a marketing budget, and determine profitability. It measures the revenue generated by each marketing dollar spend. It is often broken down into "days after first encounter" such as D7 ROAS.