Return on ad spend, commonly known as ROAS, is one of the most important performance metrics in advertising. This metric will show you how much money you made from promoting your brand across one or more paid channels. ROAS is entirely focused on your ad spending. This means that it doesn’t factor in any other revenue you made or losses you suffered by efforts other than advertising.
The enormous growth of digital advertising and its ever-increasing prominence in the marketing strategies of modern businesses has made ROAS a very important metric to assess performance. Digital advertising channels like social apps or websites provide much more actionable data to advertisers than other traditional means of advertising. Having this information at your disposal means you can calculate ROAS easily and with much higher accuracy. For example, Facebook Ads puts advertisers in almost total control over budget management and spending and provides them with tons of analytics data about campaign performance per cost. This has extremely streamlined the process of calculating ROAS for your campaigns.
If you want to start collaborating with a third-party advertising agency or prepare a new Facebook marketing campaign for the first time, be careful when asking the question “what is a good ROAS for Facebook Ads”. ItEach performance metric must be looked at from the unique perspective of your business, especially ones like ROAS that could be deceiving. I’ve seen so many entrepreneurs complaining about suffering heavy losses from ad campaigns that looked like they were generating good results, but not good enough to cover the collective costs of investments.
How is ROAS calculated?
The ROAS formula is actually fairly straightforward. To calculate ROAS, you need the following metrics first:
The total amount you’ve spent on promoting your brand, product, or service
The revenue you’ve generated with your ads
All you have to do next is to divide the revenue by the amount spent:
ROAS = Revenue from advertising campaigns / Cost of advertising campaign
Here’s an example: Imagine you’ve spent $20000 on a Facebook Ads campaign and made $40000 worth of sales from it. Your Return on Ad Spend would be 40000/20000 = 2. What this number means is that for each dollar you’ve spent on your campaign, you’ve earned 2 dollars in return.
Why it matters to calculate your ROAS
As mentioned earlier, ROAS is a highly-focused metric that only shows how well your advertising efforts have paid out. It could be calculated for more than one channel and you can figure out how much money you’ve made with all of your campaigns in different channels. The only limit here is the amount of performance and sales data those channels provide you. Clearly, digital advertising won’t trouble you, but calculating ROAS for traditional advertising methods like billboard ads could be challenging.
ROAS helps you find out whether your overall advertising strategy is working or not, and since it could be calculated for each campaign, it’s an enormous help for A/B testing. You can test different aspects of your campaigns and check ROAS to see which parts should be tweaked, altered, or removed altogether.
What about ROI?
Return on investment or ROI is also one of the most important performance metrics in the business world. It’s frequently mistaken for ROAS since it also shows how much your spending has paid out. However, ROI is much broader than ROAS; It evaluates how an overall investment has paid out, not just advertising. The formula for ROI is as follows:
ROI = ((Value of investment – Costs of investment) / Costs of investment ) x 100
You should know that ROI takes all your expenditures into account. This means you also consider logistics, operations, software, shipping, etc. costs too when calculating ROI. Sometimes these two metrics could even be at odds with each other. When this happens, it means your advertising efforts have made you more money than the amount you’ve spent on it, but your overall investments didn’t cover the costs or vice versa. Let’s elaborate with an example.
You should know that ROI takes all your expenditures into account. This means you also consider logistics, operations, software, shipping, etc. costs too when calculating ROI. Sometimes these two metrics could even be at odds with each other. When this happens, it means your advertising efforts have made you more money than the amount you’ve spent on it, but your overall investments didn’t cover the costs or vice versa. Let’s elaborate with an example.
Your company has earned $100,000 in a month after the launch of a new product. Promoting the product via Facebook Ads has cost you $25,000 and an additional $80,000 was spent on production, shipping, and personnel. The ROAS for this month would be:
ROAS = 100000 / 25000 = $4
In other words, you’ve made four times the money they’ve spent on promoting your new product on Facebook. Looks good. Now let’s calculate the ROI:
ROI = ((100000-(25000+80000))/11000) x 100 = -4.7%
As you can see, even though the ad campaign has achieved a positive result, the overall investment has not been profitable at all.
So, what is a good ROAS for Facebook Ads?
There’s no definite answer to this question because it heavily depends on several factors unique to your brand. First of all, ROAS for every vertical is different. The financial status of your business alongside the advertising channel you choose and the campaign objective you set influences your ROAS benchmarks. For Facebook Ads, it’s generally said that making four to ten times the money you spend on running campaigns is reasonable.
Running Facebook Ads campaigns on the foundation of a strong Facebook advertising strategy is key to generating a high ROAS. Prior to creating ads, you should research your potential customers well, create one or more buyer personas for your brand, and plan out a tailor-made marketing funnel that gives directions to your campaigns. A significantly powerful tool to help you in the process of building this foundation and continuously improving your ads to boost your ROAS is a Facebook ad spy tool. It helps you learn and get inspiration from the strongest players, find out what’s resonating with your target audience, and which approach could lead to more profits for your brands. Maybe it’s time to give these tools a try.
