Return On Ad Spend Calculation? It’s Sooo Simple….

return on ad spend calculation

Return On Ad Spend Calculation (ROAS) – A Quick Way To Learn About Marketing Rentability

Return on ad spend Calculation informs advertisers about the amount of dollars that a marketing campaign yields as revenue for each dollar which was invested in it. This metric, just like CPL or CPA is a result of a division of two values.

ROAS\quad =\quad \frac { Revenue\quad From\quad a\quad Specific\quad Marketing\quad Channel }{ Cost\quad of\quad a\quad Specific\quad Marketing\quad Channel }

What Is The Expected Result of Return On Ad Spend Calculation

ROAS is a result of a division, and has a linear behaviour: When the ROAS is high, it’s an indicator to the level of rentability of a campaign and vice versa. The rise or drop of this value is based on the ratio between the ad spend and the revenue.

How To Optimize The ROAS

Since ROAS optimization relies on a dividend (the revenue) and a divisor (the ad spend) optimization relies a parameter that effects the revenue and a parameter that effects the ad spend.

Examples for parameters that effect the ad spend could be:

  • Cost per click (CPC).
  • CTR.
  • CPM.
  • Number of Clicks.
  • Number of Impressions.
  • Additional transaction costs such as a broker commission fee.

Examples for parameters that effect the revenue could be:

  • Number of monetary conversions.
  • Revenue the flows into the company out of each monetary conversion.
  • Number of upsells & the average monetary revenue that they generate.
  • Number of cross sells & the average monetary revenue that they generate.
  • Additional transaction costs such as a broker commission fee.

As you can see, the parameters may vary, especially on the revenue side, because it relies on the online business’ specific revenue model.

Now, after understanding what effects the ROAS, let’s see how the behaviour of the ROAS changes according to the values of the revenue and the ad spend.

Let’s assume that the return on ad spend is now at 5, which means that on each 1 dollar he/she invests the advertiser will get 5 dollars.

Now let’s also assume that the marketing team was superb and was able to get for each dollar 7 dollars in revenue. In this case the new ROAS will be equal to 7 (a growth of 40%).

On the other hand, if the ad spend went down to $0.5, but the return on ad spend remains $5, then the ROAS goes higher twice to $10.

As you can see, in order to optimize ROAS a marketing manager should either keep the revenue go higher while keeping the same level of ad spend, or to getting the same overall revenue while decreasing the ad spend.

In real life, though, the ad spend goes higher while the revenue doesn’t have to go higher at the same rate. Hence, what’s important in this situation is to remove marketing channels which are delivering a low level of revenue or not delivering revenue at all from the marketing mix. This in turn will enable the ROAS to stay inline or even exceed it’s predefined goal.

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