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Mar 22, 2017 · 8 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.

Why Use ROAS?

Calculating ROAS can be an intricate process, but from a business perspective, it is worthwhile. 

It might require administrative resources, but once there is a process that works in place, it can make digital marketing more financially viable. 

While standard metrics like clicks and impressions are important, return on your initial investment is what matters most for a profit-making business. If your advertising is attracting thousands of people to your site but generating that traffic costs you more than you receive in revenue, your efforts will need be reassessed. 

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 $4.8 in gross revenue for every $1.00 spent through the affiliate channel. The result can typically be displayed as a percentage 476% or a ratio such as 4.8:1.

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.

Identify The Most Beneficial Campaigns

When there are several campaigns on the go, they all contribute clicks, sales, and revenues to your enterprise. Calculating the ROAS for each will provide you with a measure of relative performance, letting you instantly see which of your campaigns are generating healthy returns and which are not. Ideally, you want the ratio of your revenue from advertising to your expenses to be higher than one. A ratio of 1.72, for instance, indicates a 72 percent return. A ratio of 5 is a 400 percent return. 

When you calculate the ROAS for each of your campaigns, you’ll see a spread that will look something like this:

  • Campaign 1: Revenue: $10,000, Cost: $5,000, ROAS: 2
  • Campaign 2: Revenue: $15,000, Cost: $10,000, ROAS: 1.5
  • Campaign 3: Revenue: $3,700, Cost: $5,000, ROAS: 0.74
  • Campaign 4: Revenue: $30,000, Cost: $6,000, ROAS: 5
  • Campaign 5: Revenue: $1,400, Cost: $5,000, ROAS: 0.28 
  • Campaign 6: Revenue: $12,000, Cost: $4,000, ROAS: 3

From the examples above, the return on ad spend is highest for campaign 4 and lowest for campaign 5. It is worth comparing the range of campaigns on messaging, position of placement, size of an affiliate audience, time of day and see how they compare.  It can be a trial and error and every campaign will provide insight into future campaigns and what to consider in the future and pitfalls to avoid. 

Collecting data associated with each campaign also gives you a sense of how effective they each are at converting. Some campaigns, for instance, might attract a high number of clicks, but comparatively few sales or leads. These are all clues that there are problems in specific stages of the sales funnel you need to address. 

What Constitutes A “Good” ROAS?

It is difficult to gage what a “good” ROAS is for every business, some may require a $12:1 and others may be able thrive on a $4.1 and hence it is important to understand the company’s profit margins across their products and services, as well as the budget available for the channel, therefore there is not always a one size fits all and it is worth considering that certain sectors will see a different ROAS. Looking at your overall ROAS across all digital marketing channels, will help provide you with a benchmark to start with and then it is down to the business in terms of focus. Are you looking at cost efficiency or are you looking at growth? This will help you set what is a “good” ROAS for company. 

Thankfully, with Commission Factory’s Custom Commissions & Dynamic Commissioning, you are able to set commissions for your affiliates whilst ensuring commissions are competitive, whilst for products or specific categories you have slim margins to work with, you are not paying more than you can afford.

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.
  • The cost of affiliate commissions - This includes the amount of commission paid to affiliates per sale.
  • The cost of tenancy placements - This can include a fixed cost for an email send to an affiliate database or a banner placement on an affiliate site and it can sometimes easily forgotten when calculating the overall ROAS.

These costs are easy to forget. If you neglect to include them in your calculations, you will not 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. Comparing like for like: Different affiliate types and placements may have different ROAS and so it is something to consider when you are analysing the data.
  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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