ROAS Calculation Formula
To calculate your ROAS, use the following formula
ROAS = Revenue from Ad Campaign/Cost of Ad Campaign
The terms Current Average CPA (Cost Per Acquisition) and AOV (Average Order Value) are frequently used for Cost of Ad Campaign and Revenue from Ad Campaign respectively.
Thus, the formula for ROAS in terms of CPA and AOV is given as:
ROAS = AOV/CPA
Where:
- AOV (Average Order Value) refers to the average amount of income generated each transaction made by customer
- CPA (Cost Per Acquisition) is the average cost of acquiring a customer or conversion.
This ROAS formula evaluates how well the advertisements are doing by comparing revenue earned to money spent.
How to calculate ROAS?
Calculating ROAS (Return on Ad Spend) is a simple but effective approach to determine the success of your advertising campaigns. It allows you to see how well your ad expenditure is generating revenue.
Determine revenue from ad campaigns: This is the total revenue generated directly from advertisements. It comprises all sales or conversions related to a given advertising campaign.
Determine the overall cost of the ad campaign: It comprises all advertising costs, such as media spend, creative charges, and any other fees incurred when running the commercials.
Apply the Formula: Divide the ad campaign's earnings by its overall cost. The resulting figure demonstrates the ROAS, which displays how much revenue you receive for each dollar spent on advertising.
ROAS Calculation Example
Let’s make the ROAS formula more understanding with an interactive example:
Imagine you run an online store selling eco-friendly water bottles. You recently spent $3,000 on a Google Ads campaign, which brought in $12,000 in sales.
Here’s how can calculate ROAS:
Input Revenue from Ad Campaign: In our example, the revenue is $12,000.
Input Cost of Ad Campaign: The ad spend is $3,000.
Apply the ROAS Formula:
ROAS = Revenue from Ad Campaign/Cost of Ad Campaign
ROAS = 12,000/3,000 =4
What does this ROAS Value Mean?
Your Return on Ad Spend is 4, which means you make $4 for every $1 invested in advertising. With our ROAS Calculator, simply input your revenue and ad spend to see your ROAS instantly.
How to use ROAS Calculator?
Using our ROAS Calculator is simple. You can try on yourself by entering the various parameters mentioned below:
CPA (Cost Per Acquisition): This is the average cost spent to acquire a single customer.
AOV (Average Order Value): It refers to the average revenue generated per transaction or order.
Target ROAS: This is your targeted return on ad spend, or revenue-to-ad expenditure ratio.
If your AOV is $100 and your CPA is $20, the ROAS would be:
ROAS = 100/20 = 5
This means that for every $1 spent on acquiring a customer, you are generating $5 in revenue. Now if it aligns with your goal that you input in Target ROAS then it would appear blue and if not the result would appear red.
In case it appears red you need to adjust your parameter to exactly understand how much you need to spend on customer acquisition or how much you should generate revenue by single order.
This tool saves you time and provides valuable insights into your campaign performance, allowing you to focus on what works best.
Factors Affecting ROAS
A variety of factors influence ROAS (Return on Ad Spend). This might improve or degrade the efficacy of your advertising efforts. Understanding these aspects allows you to optimize your methods and obtain higher ROAS. Here are some of the important factors that can influence your ROAS:
Brand Popularity: If you are new to the market, your ROAS will likely be lower because your brand is less popular and trusted. As your brand gains popularity, your ROAS normally rises because of greater brand awareness and customer trust.
Type of Advertising or Ad Source: Varying forms of advertisements provide varied results. Banner ads, for example, typically have a lower ROAS since they are less likely to be clicked.
Failing Campaigns: If you have established a presence in a new market and your ROAS is less than 300%, it could suggest that your campaigns are underperforming. This could be due to factors such as ineffective audience targeting, irrelevant ad creatives, or inefficient bidding methods.
Customer Reviews: Positive customer feedback can greatly improve your ROAS by increasing trust and conversions.
Product/Service Descriptions and photographs: Clear, compelling descriptions and professional photographs can raise engagement and conversion rates, hence increasing your ROAS.
Product Pricing: High-priced items with strong value propositions can earn more revenue per conversion, resulting in a greater ROAS.
Target Audience: Ads shown to the correct audience at the right time are more effective, but broad or misaligned targeting might result in reduced engagement and more expenses.
Conversion Rate: A high conversion rate improves your ROAS by maximizing the income earned by your advertising spend.
What is Good ROAS?
A "good ROAS" can differ, but a ROAS of 3 or higher qualifies as good. This means you make at least $3 for every dollar spent on advertising. This indicates the profit to be 300% of the investment made on spending made by you on advertisement. However, the definition of a good ROAS varies depending on your industry, business model, and unique objectives. For example, if your profit margins are low, you may require higher ROAS to break even. Use the ROAS Calculator on a regular basis to establish feasible goals and improve your advertising strategy.
