Return on ad spend (ROAS)
Definition, formula, calculation, and tips
When it comes to advertising and marketing, return on ad spend (ROAS) is one of, if not the, most important marketing metrics to consider when assessing your ad campaign and your advertising budget. And considering that most businesses are scrutinizing profit margins and each dollar spent on advertising efforts, ROAS is more important than ever. In short, ROAS determines a marketing campaign’s effectiveness, which is measured by the earned revenue for each dollar spent on advertising. In this guide, we’ll review the particulars of ROAS, how to calculate it, what a “high ROAS” looks like, and how it differs from other figures like return on investment (ROI) and advertising cost of sales (ACOS).
What is ROAS?
ROAS is a metric that shows the effectiveness of an advertising campaign by measuring revenue against the ad spend. ROAS can apply to any number of measurements, such as an individual campaign run across a short period of time or an annual assessment of an advertising campaign.
The distinguishing feature of ROAS, in contrast to other measurements like ROI or ACOS, is that ROAS measures a specific campaign and how its flight has theoretically impacted revenue. Calculating your ROAS can help inform how effective a campaign is and whether or not it’s beneficial to continue it.
How do you calculate ROAS?
Calculating ROAS is simple: The ROAS formula is the amount of revenue from an ad campaign, divided by the amount spent on the campaign itself. Tracking ROAS is an important key performance indicator (KPI) and can help inform whether a digital marketing campaign is working effectively or if a specific ad is performing to expectation.
ROAS vs. ROI
As noted above, ROAS is a return on a specific ad campaign. This means directly measuring an ad spend against a set revenue number during the same period. The difference between ROAS and return on investment (ROI) is that ROI is a bit more expansive in scope. While ROAS focuses on specific campaigns, ROI takes much more of advertising spends or total advertising cost into account. This could include bringing in an agency or a specific voice for the advertising plan. Both ROI and ROAS are calculated by dividing revenue by the investment or the ad spend, depending on which you’re calculating.
ROAS vs. ACOS
Another commonly used metric in the advertising world is advertising cost of sales (ACOS). ROAS indicates how much you could anticipate earning from an ad campaign, and ACOS indicates the percentage of increase. Both are measuring the same results, but the two calculations present the information in slightly different formats. It can be useful to look at both, though, to get a comprehensive view of how your ad campaigns are performing.
Why is ROAS important?
ROAS is important because it’s a good indicator of what a brand should expect to earn from an ad campaign. It’s an early KPI that can help guide the efficiency of a campaign and set expectations for that campaign’s success. In the online retail business, monitoring ROAS can help improve digital marketing efforts and maintain spending as efficiently as possible.
What is a successful ROAS?
There are a number of variables that can come into play when determining ROAS and its efficacy, making it difficult to say what a specific benchmark of success would be. However, if you look at the figures that are produced, brands want as high of a ratio as possible. A 2:1 ROAS ratio as an average estimate would mean a brand is making $2 to every $1 of ad spend, which is a bit over the current industry average.1 However, ideally, a brand would want their ROAS to be higher, closer to 3 or 4.
How 2 brands increased ROAS with Amazon Ads
If your ROAS isn’t where you’d like it to be, that isn’t a need for panic. Assessing where your ad spend is going, how effective it is, and which approach you’re taking can help identify where the issue is. Sometimes, it’s as simple as shifting your focus from a wider array of products to just one. Or possibly shifting strategies to more specific approaches where the ROAS is already working well.
Changing your brand’s ROAS doesn’t just happen overnight or at random. Amazon Ads has tools and services available to help your brand better understand its industry, the landscape it’s working in, and the opportunities available to it. Below are examples of how two brands increased ROAS with the help of Amazon Ads.
MidWest Homes for Pets
Using Amazon Attribution, performance marketing firm Tinuiti wanted to help accelerate business growth for MidWest Homes for Pets, which offers a complete line of dog crates, small-animal modular habitat systems, and birdcages, in addition to other pet enclosure systems, bedding, and related accessories. With an understanding of which publishers and product categories are driving the most sales on Amazon, the agency was able to optimize their client’s non-Amazon campaigns and bid more effectively on top-performing strategies.
For example, realizing that the pet bed category was the most profitable and that one particular publisher was the highest performing, the agency was able to optimize their strategy to focus on the channel and tactics driving the most value for their client. By assessing the metrics found in the console—including aggregated Amazon sales, product detail page views, and “Add to Carts” by channel, together with MidWest Homes for Pets’ non-Amazon channel metrics, such as clicks, ad spend, and cost per click (CPC)—Tinuiti was able to create a unified view of performance. In doing so, MidWest Homes for Pets achieved a 32% increase in ROAS across those optimized placements.2
L’Oréal, a global beauty brand, needed to make a splash. They were launching a brand-new range of products on Amazon.co.uk and wanted to drive awareness and sales. The new product was the Men’s Barber Club range, L’Oréal’s first grooming range inspired by barbers’ vast knowledge and expertise for the expert care of beards and mustaches.
L’Oréal decided to employ their agency, iCrossing, to help drive traffic to this new product. L’Oréal outlined two objectives for iCrossing:
- Increase awareness by reaching 1 million impressions from users not already engaged with the Barber Club range
- Efficiently drive sales by achieving an overall ROAS of 280%
To increase awareness, iCrossing placed 40% of the budget on Sponsored Brands and high bids across generic terms like “beard trimmer.” Sponsored Brands can appear prominently at the top of Amazon’s results page and drive shoppers to a page featuring the brand’s products or their Store.
The results were impressive, as a significant percentage of the overall sales for L’Oréal campaigns in Q4 came from the Barber Club’s sponsored ads campaigns. The overall ROAS for the campaigns was also significantly above their set goal of 280%.