Running an ad campaign has a certain amount of risk, especially when you’re first getting started. After all, you’re spending money in hopes that you’ll make money. A business runs on the principle of “money out, money in”, and a good business has greater incoming funds than the investments.
But how do you accurately determine whether your ads are actually performing the way you want them to? While you can obviously see the amount of money that goes into your ad campaigns, and the total income from your sales from month to month, how do you correlate how ad spend relates to your overall investment?
Furthermore, is it really profitable, as long as one number is bigger than the other? This is where learning to calculate your Return on Advertising Spend can be extremely helpful.
What Is the Return on Advertising Spend?
Return on Advertising Spend, or ROAS, is a measurement in the marketing world that helps business understand the amount of revenue made for each dollar spent on each type of ad.
Most business owners run several ads at one time. For example, you might have ads running through Facebook and Google (read how to get started with Google Ads). It can be hard to determine how well each ad is performing, based only on your total spend and revenue figures.
Calculating the ROAS can help you better direct your advertising dollars, by allowing you to see which campaign is performing better, and where you should invest more to drive even more profit.
How Is ROAS Calculated?
Calculating the ROAS is actually pretty simple. First, you’ll want to add up every cent you’ve spent on a particular ad campaign. This can include ad placement, keyword bids, any wages or commission paid to others for assistance in placement or design, etc, depending on how deep you want to go for this particular ad.
For example, if you had a professional create your logo (learn how to hire one), and you use that logo in every single ad you place, you might not want to include that expense in your calculation. But if you had a designer create a very specific splash ad page, you may want to see how that ad performed before you invest again.
To calculate your return on ad spend, you’ll follow this easy formula:
ROAS = (revenue from an ad) / (the cost of that ad)ROAS Formula
So, if you spent $1000 on an ad campaign, but made $6000 in revenue from that particular ad, your ROAS is 600%. In simpler terms, that means for every dollar you spent, you received $6 of revenue.
You may wish to take this further to determine how much actual profit you receive from this investment. In order to do this, you’ll want to follow this formula:
Profit = (Revenue – Cost)/ CostProfit Formula
Using the examples above, if you spent $1000 total on your ad campaign, which resulted in $6000 in sales, your actual profit would be:
(6000-1000)/1000 = 5
This means that for every dollar you spend, you’re actually profiting by $5. Not bad!
What Does ROAS Tell Us?
Each calculation will tell you how your advertising spending compares to the revenue you receive through that particular ad. Whether or not you choose to drill down into the total profit from each ad or not, you will be able to see if your ad is performing well, and at least providing an equal return on your spend, or whether it is losing you money.
The goal, after all, is to make money!
For each type of advertising you pursue, consider calculating ROAS regularly to gauge how well your investment is performing. This will help guide your decision-making in your future advertisements. Remember, you have control over where your ad money goes, so you need to know whether your money is well-spent, or should be directed elsewhere.
Let’s say you have two ad campaigns running simultaneously. You are spending $1000 on each campaign. After one month, you calculate your ROAS.
In Campaign 1, you have a revenue of $6000. In Campaign 2, you find that you only have a revenue of $2000. Clearly, Campaign 1 has a higher ROAS.
From here, you can choose to either end Campaign 2, or reduce your spending on this particular ad. More importantly, you may choose to increase the amount you’re spending in Campaign 1.
If you’re making $5 for every $1 you spend, as evidenced in our earlier calculations, then you have the opportunity to make even more with a higher investment.
But let’s say you review the figures in a few months, and find that the ROAS has changed. Campaign 1 now has a profit figure of 1. Knowing this, you can choose to suspend or discontinue that ad, and find a new way of advertising your products or services. Meanwhile, your newest ad, Campaign 3, is off the charts, with $10000 in revenue for a $1000 investment.
If you were just looking at the overall picture of “money out, money in”, you would not be able to determine which ad was performing better, and you might continue to put the same $1000 in each ad campaign, knowing that you’re coming out ahead with an overall profit.
By calculating the ROAS on each type of advertising avenue you pursue, you’re able to notice where that money goes, and determine how much you wish to invest in each ad campaign at any given time. This helps you earn the greatest amount of profit at any given time, and stop throwing money into ads that are not making any money, or even losing money.
Advertising and marketing will always carry a certain amount of risk with it. After all, things can change in an instant, and your very successful ad may suddenly generate no interest.
By calculating your Return on Ad Spend figures regularly, you’ll be able to keep your eye on your budget, spending, and revenue to determine where your money is best spent. The goal is to earn even more money, and to do so, you must spend wisely. Tracking profit by ad spend is a great way to make sure you’re being as careful as possible.