PPC, SOLUTIONS 8
How to Calculate ROAS (Return on Ad Spend)
There are dozens of ways to measure the performance of a Google Ads campaign.
But at Solutions 8, we argue that ROAS should be one of your highest priorities when it comes to tracking campaign performance.
ROAS is so much more than just another acronym in our (acronym-addicted) industry.
Here’s the skinny:
ROAS = Return on ad spend.
In other words, for every dollar you spend on advertising, how much do you get back?
How to Calculate ROAS
So, what’s your current return on ad spend?
It’s actually pretty simple to calculate. First, you’ll need to determine:
- How much money you spent on Google Ads (ad spend)
- How much money you made on the products sold by those ads (revenue)
…then just plug those numbers into this formula:
Revenue ÷ Advertising Costs = ROAS
Or use our ROAS calculator below:
Give Me an Example
Okay, let’s say you spent $500 in ads and made $1000 in revenue so far this month. Your formula would look like this:
1000 (Revenue) ÷ 500 (Ad Spend) = 2
This means you’re looking at 200% (2X) ROAS.
And that’s good, right?
You doubled your dollar!
…Well, for many businesses, 200% might not even be breaking even.
Sure, you doubled your dollar in ad spend; but ideally, the revenue those ads generate should do more than just pay for themselves — we want our return to cover the majority of your fixed costs, too.
Okay, So What Should Your ROAS % Be?
Here’s an answer you’ll love:
Generally, a 300% return ($3 in revenue for every $1 spent on advertising) is considered a “golden rule” for ROAS.
But the reality is every business is different — with unique costs and overhead, which is why:
It All Comes Down to Profit Margins
(i.e. the percentage of sales that turn into a profit).
Between rent, production costs, payroll, shipping, insurance — the list of fixed costs are nearly endless for a business to stay up and running.
So, to determine what your ROAS goal should be, you first need to calculate your profit margin.
See, the larger your profit margin, the lower your ROAS goal needs to be.
A smaller profit margin? A higher your ROAS goal.
Another Example, Please!
Let’s say you have a 25% profit margin.
So, after paying for rent, employees, production, an Ads agency, and every other fixed cost to keep business afloat — you still manage to keep 25% of the money you bring in.
Now, Use Your Profit Margin to Calculate Your ROAS Goal
Ready to dust off those algebra skills? To figure out your ROAS goal, we need to solve for y:
100% = (Current Profit Margin%) X (y)
Let’s break that down.
In order to reach 100% profit (the ultimate business goal), you need to determine how many times your current profit margin must be multiplied.
So, here’s that equation using our example of a 25% profit margin:
100% = 25% X (4)
In this example, you need to multiply your profit margin four times over (4x) to reach 100% profit. Putting your ROAS goal at:
In other words, whatever the multiple is (y) that you need to reach 100% profit (using your current profit margin) is your minimum ROAS goal; just turn that number into a triple-digit (e.g. 4X = 400 and 1.5X = 150) and a percentage sign at the end.
And, voila! You’ve got your ROAS goal.
A Quick Overview
Before we go any further, let’s do a quick review:
- To calculate your current ROAS%, simply divide your revenue by the amount of money you spent on ads.
- To calculate your ROAS% goal, determine what your current profit margin is and how many times that number must be multiplied to hit 100% profit.
Where Do You Measure ROAS, Exactly? A Single Campaign? Ad Groups?
Believe it or not, ROAS isn’t a pre-existing column inside of Google Ads. You can, however, customize your dashboard to include ROAS%.
Once that ROAS column is in place, you can measure your current ROAS at any level:
- Your Ads account
- A campaign
- Ad groups
…You name it, you can measure it.
As long as you know how much you’re spending and earning in each category — you can determine your ROAS%.
Why Your Ads Agency Should Use ROAS to Measure Success
ROAS is a glimpse at the big picture.
See, your ROAS% is about more than how much money you get back from your ad spend; ROAS is a pulse-check on your overall business.
While other metrics like click-through rate, impressions, and cost per conversion are valuable, they don’t show us how much revenue these actions bring in.
Sure, they tell us about leads — but not the quality of those leads.
Think of it this way: ROAS shows us that, while some campaigns might rank poorly for traffic and conversion metrics, they might actually be the most profitable.
In this example, although the campaign is limited by budget, it is absolutely crushing the ROAS game.
Conversely, a campaign with incredible traffic may have crappy sales and cost more than the actual sale is worth.
To put it (really) simply:
If your online ads aren’t making you money, you need to change something.
But, if you’re not tracking ROAS, you won’t know what to change.
How to Obtain Your ROAS Goal
How you use ROAS data can have a massive impact on your business as a whole.
And while it’s easy to calculate your ROAS and come up with a strong ROAS goal — it’s not quite as easy to obtain that goal on your own.
This is why most businesses hire a PPC agency: to analyze, measure, and strategize using the data from your Ads campaigns.
At Solutions 8, we take ROAS seriously. If you have questions about your current ROAS, what it should be, and how to get there — reach out.
We’re here to help.
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