What Is a Good Return on Ad Spend (ROAS) for Your Business?

So you have a company, and to promote its products, you are advertising them online and offline? Good! But, How much revenue do you get from all this advertising? You need to know the answer to this question if you decide to invest in advertisements. But how can you do that? One of the best ways to calculate your revenue is Return On Ad Spend, or in short, ROAS.

In this article, the things that we are going to discuss revolve around ROAS. Where we will cover: What is ROAS, what is considered a good ROAS for your business, Factors that determine your ideal ROAS, how a business can improve its ROAS, and how a business should measure ROAS effectively. So, why waste more time? Let’s begin!

What Exactly Is Return On Ad Spend (ROAS)?

Before we understand what ROAS is? Let’s make one thing clear first: ROAS deals with the revenue you generated, not the profit. Revenue is the sales your ads attracted, while profit is the money you had after deducting all the expenses; in short, they are not the same

Now that we have taken it out of the way, let's understand what ROAS is and also how it works. So, as we have already discussed, ROAS is a system that helps the business know how much revenue it generated through its ads. So, with the help of ROAS, businesses understand if their ads are bringing in enough customers and increasing their sales or not.

The formula for this is: ROAS = REVENUE FROM ADS/ADVERTISING SPEND

Let us understand this through an example: if your business spends ₹5000 on Ads and those ads generate ₹9000 in sales, then the ROAS will be 9:5, which means ₹9 is generated as revenue for every ₹5 spent on ads.

But keep in mind that ROAS only calculates the revenue not the profit, and it does not look at the whole picture, you may be confused let us understand this with the help of an example, suppose a customer wants to buy your product (they have made up their mind that they will buy it) then they come across an ad promoting your product, so they click on the ad and buy your product, here as you can see, the ad doesn’t impact their desire to buy the product, even without the ad they would’ve bought it anyway. But ROAS only checks how many people clicked on the ad and bought the product (and not the whole picture).

What Is Considered A Good ROAS For Your Business?

As we have already discussed, ROAS calculates the revenue (Not the Profit) acquired through ads. So a good ROAS is the worthwhile sales revenue recovered through the ads, and when comparing the ads with the revenue, the sales revenue is comparatively more than the amount spent on the ads. If you spent ₹1000 on ads and the revenue was ₹5000, then the ROAS is 5:1.

A company needs to consider that they not only spend money on ads, but also on many side hustles like purchasing (or Producing) products, packaging, delivery, and many other such expenses. So one must keep in mind that a higher ROAS doesn’t necessarily mean a high profit because (as we have already discussed) ROAS only calculates the sales revenue recovered through the ads (only), but it doesn’t take into account the total expenditure on the stuff we have discussed above.

So no single number is “good” or “bad”. Suppose a small company invested a small amount in ads and the revenue through the ads was high. Now another company (a bigger company) puts in money on ads recovers the same amount of revenue (like the small company) the only difference being the big company had many other expenditure like packing, delivering and many other compared to the small company. Here the revenue sales which was profitable for the small company the same revenue sales was not profitable for the big company. And here the profit difference exists not because of big or small, but because one company invested less in these other things while the other invested a lot in those things.

What Factors Determine Your Ideal ROAS?

• Profit Margins: This factor tells the business how much profit it acquired after deducting expenditures. In simple words, after all the deductions and expenditures (like delivery, packaging and others), how much of the revenue remains with the business.
• Product Prices and Operating Expenses: Your product’s price and its expenses directly tell you how much revenue your product needs to bring in from advertising. But keep in mind, just selling of a product doesn’t give you the final revenue; you need to consider how much it costs to produce the said product, like manufacturing, delivering, packaging, all that stuff.
• Customer Acquisition Cost: Now, what is Customer Acquisition Cost? Well, it is the cost that you spend to bring in, or shall we say, attract new customers. You know advertising your brand that wil help you in gaining new customers. But then this expenditure must align with the revenue those customers are bringing in.
• Repeat Purchases and Customer Lifetime Value: Many times, customers come and buy something really costly from you, but it doesn’t guarantee that those customers will return in the future. Meanwhile, there are customers who don’t buy that costly of a thing in their first purchase with you, buttt in the future they return and buy many other products, which eventually brings in an ideal ROAS. So Repeat Purchases and Customer Lifetime Value is how much revenue a company can expect from a particular customer in a whole. Meaning, the revenue you can expect to get from a customer throughout your relationship.
• Business Goals: Now, the final point talks about a company’s goals and how they are associated with the revenue you get from advertising. What are the goals you are trying to achieve through those ads? Is it good revenue? Or profit? Or probably new customers? Every company has different types of goals, and these goals decide the ideal ROAS you can gain from the ads.

How Can a Business Improve Its ROAS?

Reach the Right Audience: When you invest in advertising your company, you may try to reach almost everyone in the public, thinking, “If I advertise it to a lot of people, then automatically it will get me customers.’ But you couldn’t be more wrong. More people are not the same as more customers. A company must instead try to reach people who are its potential customers, who would buy those products anyway.

Make the Advertisement More Convincing: Suppose you reach your customers, but when you advertise your products, they might just look at it and ignore it. But why? The main reason behind this could be because your ads were not convincing enough to attract their attention. To understand this a little better, let's look at this example: if your product is a waterproof bag, but in your ad it’s just showcased as a bag with a low price, then the customers you are targeting who are looking for a waterproof bag might ignore it because they didn’t find any evidence (forget evidence, there was even no mention) that the bag is waterproof, so naturally they’ll ignore it.

Make Purchasing Easier: Now your ads are convincing and are targeting a particular audience, and you are noticing new visitors to your website, but those new visitors are not becoming customers and making a purchase. But why does it happen? Many times, a customer visits a site to buy a product after seeing its ad, but when they enter the website,e they find unclear payment information that was not there in the ad, like an unclear price or sudden delivery charges, and other unclear payment details that may confuse and sometimes disappoint a customer who really wants to buy. So keep in mind that all the payment details must be clear in your ads themselves.

Test Different Ads and Invest in What Works: When you are trying to promote your products through advertisements, don’t just think that you just need to invest in one ad which will attract many customers, NO! You have to try many ads and see for yourself which ad works best in gaining more customers. Each ad must have a different type of messaging, different catchphrases, and can promote different features of the products, and then look at the one that generates the most customers.

How Should a Business Measure ROAS Effectively?

Track Actual Sales Revenue Accurately: You need to monitor the revenue a particular ad generates and how much you spent on that ad. Also keep track of orders that were cancelled by the customers and the refunds.

Understand Which Sales Come From Ads: If a customer is browsing and that's when they come across a particular ad, they click on it and buy the product, then the revenue is credited to the sales. But remember an important thing: sometimes a sale that is credited to an ad could be misleading in the sense that, maybe the customer clicked the ad and bought the product, yes! But maybe they were already planning on purchasing the product anyway. Here, the ad just sped up the process but was not the main reason for their purchase (far from it actually).

Check Whether Increasing Ad Spend Is Worthwhile: Okay, so now you have an ad that is bringing in new customers. But is it bringing in revenue that matches the money spent on this ad? You need to check that, and this will help you decide if you should invest more money in the ad. Will increasing the Ad spend bring additional revenue or not?