What is ROAS and Why is it important?

Nothing New Just a Fresh Reminder

ROAS stands for Return On Ads Spend. This advertising is a broad concept. While this is valid for any medium you choose to advertise in, some are harder to measure the return in monetary value than others. Today I will try to break down how this ROAS is calculated in general how to narrow it down for certain mediums and why it is more important than you know.

The General Intuition of ROAS

ROAS is the measurement of how much you are getting in return for your spending in the advertisements. The mathematical formula is as follows:

ROAS Formula

As for a toy example; if you spend 100$ on an advertisement campaign and generate 300$ in revenue then the ROAS is 3. Sounds simple, right?

The Dilemma of Calculating ROAS

As much as it sounds simple, actually, it's quite the opposite, especially when it comes to traditional advertising mediums. Say you aired your advertisement in between a TV program and reached millions of people and that campaign costed you 500000$. Here comes the hard part. How do you calculate the return of the ad?

You can assume the revenues generated from the next 7 days is the direct effects of that advertisement. It's not wrong but it certainly is not right either. To some extent, the advertisement has a direct effect but not all. It's either too good of a ROAS value or too little. Therefore, if you are to calculate the ROAS value from this assumption you might end up having a wrong impression of the strength of the advertisement campaign.

Whether you like it or not, first you have to understand and admit that accurate ROAS can never be calculated, rather you can only estimate it to portrait a picture close to reality.

The situation is quite the opposite for online ad platforms like Facebook Ads, Google Ads and etc. For these kinds of online ads, you can track the conversion rate and revenue generated by following the backlinks, thanks to the technological infrastructures behind it. You can calculate a pretty close value of ROAS that paints the picture ever closer to reality. As a consequence, you know the effects of your ad campaign and tweak and change things accordingly.

Therefore, I will only be taking online ads and their ROAS value into account in this blog.

Why is ROAS Important?

Now you know what is ROAS and how to calculate it for online platforms. But why is it so important?

Often you hear the jargons like tricks to double your conversion rate, reach more target audience and etc. To give them some credit, they do work but no one ever mentions the real cost behind this. The cost being the amount of money spent on the advertisement campaigns. It is simple; if you spend tons more you are more likely to generate more conversion rates. But that is unsustainable for any company and that is the reason why no one bats an eye for the ROAS value.

Yes, it is much harder to increase the ROAS value, far more than the other advertisement campaign success measurements like conversion rate, audience reach matrices, and etc. You have to face both sides of the coin. Increase the conversion at the same time decrease the spending on the advertisement campaigns. This is the definition of the marketing department's dream achievement.

Increasing the conversion rate means the ad campaigns were able to reach the right and relevant audience. Read the relevancy of modern ad campaigns and their importance here; One Step Closer to Achieving A More Relevant Advertising

Therefore, you are already halfway through. If your ad spending is in check then it means you are not increasing the ad campaigns reach blindly, rather you are reaching the precise target audience for your products.

Decreasing the spending on ads also means you are taking the right actions in your campaigns. Here is a toy example; If you are to launch a campaign saying 90% discount on these products, you bet the conversion rate would skyrocket before you know it. However, you are that's a huge cut and can potentially lead to much bigger problems.

If you are to know the needs of the target audiences then you are in an advantageous position. If you know a certain segment of the target audience can be convinced with simple free shipping then just go for that. If you know another certain segment of the target audience that can be convinced with a simple 10% discount coupon then just for that. My point is knowing what is going to trigger the target audience is much more beneficial in the longer run.

In this way, you are going to reduce the ad spending significantly while simultaneously increasing the conversion rate and revenue generated over time. What a dream come true for any marketing department in the world. So don't we just do this?

Cliffhanger

There is a reason why people choose to overlook ROAS and focus on other measurements. While it might be hard to optimize ROAS, it's not impossible. in the next blog post, I will share an analytical approach based on data science using Enhencer Software for achieving the best ROAS value. I know this is cliché, but this blog post is long enough already.

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Written By M. Ahmed Tayib