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Mar 22, 2017 · 6 min read

What is ROAS? Calculating Return On Ad Spend

Maintaining a profitable affiliate program can be a daunting task, and it can be easy to only focus on growing top line revenue.

Online marketing can increase the amount of exposure and traffic that your website receives. In turn, this can increase sales and help your business grow. To reach your target audience, invest some advertising dollars on various online advertising efforts.

To calculate and measure the efficacy of various advertising campaigns, you’ll need to calculate and measure the Return on Ad Spend. This is a metric that measures the effectiveness of each advertising campaign to evaluate which methods and techniques are working and which campaigns require improvement. The ROAS calculates how much you will need to spend on an advertisement campaign in order to generate a certain amount of revenue.

The Importance of Understanding ROAS

When trying to expand and grow your business, a better understanding of the Return on Ad Spend can help you:

  • Better budget in the future
  • Develop more effective strategies that elicit a better response from customers and to increase business exposure
  • Figure out where to invest your advertising budget

How to Calculate ROAS

The Return on Ad Spend follows a specific formula: ROAS = revenue generated/ amount spent.

An example is: an advertiser generates $50,000 in gross revenue each month through their affiliate program. In turn they spend $10,500 in affiliate commissions, network fees, and other direct expenses during that same period. The ROAS is calculated ($50,000/$10,500) — meaning the advertiser generates $4.76 in gross revenue for every $1.00 spent through the affiliate channel. The result can typically be displayed as a percentage or a ratio such as 4.76:1.

Affiliate programs are an attractive marketing option because they’re inherently self- funding. Instead of buying advertising upfront and hoping it leads to later sales, you only pay a commission when a sale occurs via an affiliate program.

How to Figure Out What ROAS Is Considered Good

There isn’t a set ROAS that companies need to reach. An acceptable ROAS will differ from company to company depending on their profit margin, their operating costs and the overall health of their business. While some companies may barely get by with a Return on Ad Spend of $10:$1, others might flourish with a ROAS as little as $2.5:$1. In general, however, a common ROAS benchmark that most companies strive to meet is $4:$1. At this ratio, the ad campaign is not only effective, but also generating good revenue.

Additional Costs to Factor In Calculating ROAS

When calculating the ROAS of each advertisement campaign, you should also remember to factor in the following:

  • partner and vendor costs. This include all of the fees and commissions that need to be paid out to partners and vendors that work with you on either the campaign or channel level like the salaries of in-house advertising employees.
  • the cost of affiliate commissions. This includes network transaction fees, payment transaction fees and the amount of commission paid to affiliates per sale.
  • the returns from clicks and impressions generated from each advertisement campaign. This includes factors like the total amount of clicks generated by each campaign, the cost per click and the cost per thousand impression.

These costs are easy to forget. If you neglect to include them in your calculations, you won’t get an accurate representation of the efficacy of each ad campaign.

As with any marketing channel first and foremost your KPI’s should be considered. The most commonly adopted KPIs for affiliate marketing are leads, conversions, conversion rate and cost per acquisition (CPA). Implementing a successful affiliate marketing program is not without its pitfalls and misconceptions that can hurt your ROI but are all easily avoided when you know what to look for and how to optimise or reward affiliates and your overall program.

How to Optimise an Ad Campaign to Improve ROAS

If you’ve determined that there’s room for improvement after calculating the ROAS, here are several tips that you can consider implementing:

  1. Remember to allocate resources to the campaign. No online marketing campaign should run on autopilot. To better cater to customers, tailor each ad campaign to the right audience and specifically outline the benefits and features of each product. To create an effective and attractive ad, you’ll need to allocate employees, time and money to it.
  2. Focus on the right metrics. To calculate the ROAS and to determine the effectiveness of each ad campaign and its Return On Investment (ROI), you’ll need to analyze key metrics to determine what the conversion rate of each ad is, the amount of sales that are generated, among other factors.
  3. Focus on one network at a time. The more ad campaigns that you have running, the messier things get. Focus on one network at a time regardless of whether you’re interested in affiliate marketing or in-house marketing.
  4. Better define the rules and policies. Build a strong and better relationship with affiliate marketers and advertisers by establishing clear rules and policies. Establishing expectations early on will yield better results.

Affiliate Marketing Strategies that Yield Higher Returns and Attention

Among all of the different advertising opportunities available, affiliate marketing is extremely popular. Calculating a ROAS for affiliate marketing is also relatively simple, as most networks provide all of the metrics required for the calculations. To improve interest, implement the following strategies:

  • Approve affiliates to ensure that only the best marketers are representing and working with your product or services.
  • Offer higher starting commission rates to encourage better program uptake.
  • Communicate regularly with all affiliate marketers to form better relationships and to get further insight on how to improve your program.
  • Research the rates and benefits that your competitors are offering to ensure that your program stays competitive.
  • Offer two-sided programs with two commission rates. One rate is for the public and another is for top-performing marketers and networks. It’s best to avoid constantly changing commission rates, as disruptions and interferences can negatively impact affiliate relationships.
  • Set up programs, so that affiliates are awarded when customers return and make additional purchases. This will make your affiliate program a lot more appealing, as affiliate marketers can continue to earn commission for their hard work and effort.

Maintaining an online business can be difficult. Knowing what your bottom line is, and how each advertising campaign is affecting your sales can help you determine which campaigns to keep and which campaigns to cut loose. The Return on Ad Spend is an effective tool for your business in these situations, and can provide you with the analysis and report needed to make an informed decision that will better your business in the long run.

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