ROAS, an acronym for Return on Advertising Spend , is one of the most crucial performance indicators for companies that invest in advertising. This indicator measures the effectiveness of advertising campaigns, calculating how much economic return is obtained for each franc/euro spent on advertising. With the increase in online competition and the growing importance of targeted marketing strategies, understanding and optimizing ROAS has become essential for any business, large or small.
Returns, awaited by some of the readers of the Business Blog, the monthly column on the main Performance Indicators (KPI, Key Performance Indicators) fundamental for every Business (Online, Offline, Omnichannel). Today you will learn to love ROAS and your advertising campaigns.
What is ROAS? And how is it calculated?
ROAS is a ratio that indicates the return obtained from an advertising investment. It is calculated by dividing the value of the revenue generated by advertising by the cost of advertising itself. The formula is simple:
ROAS = Revenue generated from advertising / Cost of advertising
For example, if an advertising campaign costs CHF 1,000.- and generates CHF 5,000.- in revenue, the ROAS will be 5 (or 500%). This means that for every franc (or euro) spent, the company has earned five francs.
Why is it Useful and Fundamental to Use ROAS?
ROAS is a powerful tool for several reasons:
- Advertising Efficiency Measurement: Understand which advertising campaign or channel delivers the best return on investment, allowing you to better allocate resources.
- Budget Optimization: Knowing the ROAS of different campaigns allows you to invest more in the most profitable campaigns and less in the less efficient ones.
- Continuous Analysis: Enables constant monitoring of performance, helping companies be agile and adapt their strategies in real time.
In an increasingly competitive market context, not using ROAS to optimize advertising campaigns means giving up a crucial competitive advantage.
Difference between ROI and ROAS
ROAS is often confused with another key indicator: ROI, Return on Investment . Although they are related, these two indicators measure different aspects.
- ROAS: Measures the return generated by advertising investment only. It is specific to evaluate the effectiveness of advertising campaigns.
- ROI: It is a broader indicator that measures the return on any investment, considering all costs incurred, not just advertising costs.
In other words, ROAS focuses exclusively on online or offline advertising performance, while ROI offers a more general view of the profitability of an investment, including production costs, distribution, etc. Often when a traditional offline campaign is carried out (such as billboards for example, or banners on a paper newspaper) it becomes more difficult to accurately measure the return on advertising spend, usually one falls into hypotheses. In the world of online advertising, this is much simpler and one gets to define exactly how that campaign is performing (always with the exceptions of the case, it also happens in online that one has to cross-reference data to understand the actual effectiveness of that campaign).
There are also cases in the online world where a sale is attributed to an advertising channel (Meta or Google Ads for example) and instead it is a classic word of mouth, or vice versa.
Imagine this scenario, you have tried a new product, you are enthusiastic about it, you share your opinion with friends: 1 or more people among your acquaintances could finalize a purchase and this could result as a "google search" or as a direct session.
A simple example to understand that, even in the analysis of online numbers, it is important to always contextualize the data and reports that we can easily obtain from platforms such as Shopify, Google Analytics, etc.
ROAS Reference Values
There is no standard ROAS value that can be considered universally positive or negative, as it varies based on the industry, business model and profit margins. However, some general guidelines can be provided:
- Positive ROAS: A ROAS of 3 or 4:1 (or 300%) is generally considered a good starting point. It means that for every dollar spent, the company earns three dollars. This is often seen as the minimum to cover costs and make a profit.
- Negative ROAS: A ROAS less than 2:1 (or 200%) is considered negative, as it indicates that the campaign is not generating enough revenue to cover advertising costs.
- Exceptional ROAS: A ROAS above 6 or 10:1 (or 1000%) is considered exceptional and indicates an extremely effective campaign. However, it is rare and often associated with very well-targeted campaigns or industries with very high profit margins.
It is important to underline that the ideal ROAS varies depending on the business model, the fixed and variable costs of the company, and the specifics of the market in which it operates.
How to Optimize ROAS?
Optimizing ROAS requires a strategic approach and the use of advanced analytical tools. Some of the most effective techniques include:
- Accurate Targeting: Segment your audience and personalize your advertising messages to reach the customers most likely to buy.
- A/B Testing: Test different versions of campaigns to identify the most effective ones. Different copy, different creatives, alternating modes and channels.
- Sales Funnel Optimization: Ensure that the entire sales process, from click to purchase, is seamless and optimized for maximum conversion.
Conclusion, measure the profitability of your Marketing campaign
ROAS is a key indicator for anyone investing in advertising, as it provides a clear measure of the profitability of campaigns. Understanding and optimizing ROAS not only helps improve marketing efficiency, but can make the difference between a successful campaign and a failed one.
If you want to understand how to optimize your company's ROAS and improve your marketing campaigns, contact us today . We are ready to help you get the most out of your advertising budget and take your business to the next level.
Do you want to increase the profitability of your advertising investments?
Professione Business can help you develop effective strategies to monitor and improve the ROAS of your advertising campaigns. Contact us today for a personalized session and discover how we can help you reach your growth goals.
Start with this question, do you know the Return on Advertising Spend of your Marketing campaigns?
