Calculating ROAS Formula: A Beginner’s Guide to Return on Ad Spend
Marketing has too many acronyms. There, we said it. CPA, LTV, TVA — it can all get incredibly overwhelming. In fact, one of those acronyms isn’t even a marketing term, it’s a reference to Disney Plus show Loki.
But as you build out your online store’s advertising strategy, there’s one metric you absolutely need to understand: ROAS. Luckily, by the end of this 6-minute guide, you’ll have all you need to take full advantage of this powerful tool.
What Is Return On Ad Spend (ROAS)?
ROAS (return on ad spend) is a marketing metric we use to measure the effectiveness of an ad, campaign, or even an entire account. The figure itself is analogous to a more general metric, return on investment (ROI) — the difference is that investment here is your advertising costs. In more human terms, it’s the amount of revenue generated per dollar spent on advertising.
The ROAS calculation is a crucial tool for marketers and e-commerce operators. Without the right data feedback, you could be spending hundreds, even thousands, on Facebook and Google Ads that aren’t driving any revenue for your business.
Your ROAS metrics allow you to iterate on your ad campaigns more effectively and easily — simply identify your highest revenue-generating ads, mimic their best features, and apply them to your other ads as well. When you calculate ROAS, you can make your marketing data-driven.
The Formula For Calculating ROAS
Calculating ROAS is easier than you might think. At its core, it is simply the revenue generated by an ad (sometimes called the conversion value) divided by the cost of the ad itself:
ROAS = Conversion value ÷ Cost
(ROAS can be in dollar units, a multiple, or a percentage).
By taking the revenue generated instead of the number of acquisitions (or cost per acquisition) we get a better idea of the big picture effectiveness of our ad expenditure.
For example, imagine we had two ad campaigns.
- Example #1: A $5 ad led to one $20 purchase.
- Example #2: A $5 ad led to one $100 purchase.
In both examples, CPA is $5. But in example #1, ROAS is $4 vs. $20 in example #2. The second is driving higher value conversions, which is information that gets lost if you only use CPA.
What Is A Good ROAS?
While industry standards range between $3 to $4 (3x - 4x) ROAS values, the ideal revenue to ad spend ratio depends on your profit margin. If every conversion has a high-profit margin, your ROAS can be lower. If your products aren’t quite as profitable, then you’ll need a higher ratio.
Here’s how you can determine your target ROAS:
First, determine your profit margin. Let’s assume it’s 20%. What do you need to multiply that margin by to reach 100% profit? Algebraically:
100% = 20% × a
To solve for a, divide both sides by 20%:
a = 5
5x (or $5 and 500%) is your minimum target ROAS value.
Calculating ROAS in Google Ads
One of the best ways to get a feel for your eCommerce ROAS is through your Google Ads Dashboard. To determine your ROAS value, you need to ensure that you have tracking enabled for your website shopping cart. You’ll want to include Conversion value as one of your conversion actions — if you’re using Shopify’s Google channel, this will be done for you automatically.
If not, you’ll want to follow these instructions for implementing conversion value tracking. In Google Ads, include a column for Conversion value/Cost, a section that will fill up with decimal numbers — this is your ROAS. Notice how high conversions don’t necessarily mean profitability?
Upgrade Your E-Commerce Game With Flaym
Measuring how much you spend on advertising and quantifying its impact with an ROAS calculator is one of the best ways to augment your e-commerce marketing. The world of online advertising is filled with metrics and acronyms, but ROAS is among the most useful ones you’ll encounter.
Want more advice on how to take your Shopify eCommerce brand to the next level? Reach out to the experts here at Flaym to improve your online store’s UX, branding, and more!
How do you calculate ROAS in Excel?
On a company-wide scale, ROAS is simply your revenue divided by your advertising costs. Export this data out from your Shopify or Google Ads dashboard and use the division operand to find the ratio. On a more granular level, divide your conversion value cells by the ones with total cost.
What’s the difference between ROI and ROAS?
Return on investment looks at all factors that go into a project, including labor, tools, supplies, and more. ROAS is concerned with return on advertising spending only.
Both metrics are valuable, but ROAS is more pertinent to marketing.
What ROAS should I aim for?
Most companies should aim for revenue to advertising cost ratios of about 3 or 4. If your company has massive profit margins, this figure could be lower — if the opposite is true, aim for far higher ROAS values.