What is ROAS? How to Calculate Return on Ad Spend

Maintaining a profitable affiliate program requires being able to decipher what is ROAS, before being able to grow top-line revenue.

Online advertising can increase the amount of exposure and traffic that a website receives. In turn, it helps in increasing sales and growing the business. To reach a target audience, publishers and advertisers should be looking to invest their advertising dollar on a range of online advertising efforts.

To calculate and measure the efficacy of various advertising campaigns, advertisers need to calculate and measure the return on ad spend (ROAS). 

Table of contents:

• What is ROAS?
• Why Use ROAS?
• Why Understanding ROAS Is Important
• How to Calculate ROAS
• Identify The Most Beneficial Campaigns
• What Constitutes A “Good” ROAS?
• Additional Costs to Factor In Calculating ROAS
• How to Optimise an Ad Campaign to Improve ROAS
• Affiliate Marketing Strategies that Yield Higher Returns and Attention

What is ROAS?

Return on ad spend (ROAS) is one of the most important metrics for online advertisers. It measures the effectiveness of each advertising campaign, in order to evaluate which methods and techniques are working and which campaigns require improvement. 

The ROAS calculates how much brands will need to spend on an advertising campaign in order to generate a certain amount of revenue. To simplify, ROAS is a measurement of how many dollars brands will receive for every dollar they spend on advertising.

Brands who aren’t tracking ROAS along with other key marketing metrics, are missing the benefits of this comprehensive data.

Why Use ROAS?

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

ROAS is critical because it helps in determining how a marketing strategy or initiative is contributing to a business's bottom line. Most brands want to ensure they’re not losing any money when it comes to ad spend.

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 initial investment is what matters the most for a profit-making business. 

If an advertising campaign is attracting thousands of people to a site but generating that traffic is costing more than a brand is receiving in revenue, then obviously, these efforts will need to be reassessed.

Why Understanding ROAS Is Important

Without a proper understanding of ROAS, it becomes difficult to identify and determine which underperforming ad campaigns should be paused, or redeveloped and which winning campaigns an advertiser should continue running.

Not pausing an underperforming campaign at an early stage can prove to be an expensive exercise. On the converse side of this, pausing a campaign too early will give inadequate information and incomplete performance. 

Once brands understand their ROAS across different advertising channels, they will be able to avoid both of the situations described above and set a benchmark with good conversions. 

ROAS is particularly significant for brands planning to enter a new market. With ROAS, businesses are quickly able to test the commercial viability by comparing it across both local and international channels. 

This results in significantly less ad spend as brands can verify that a campaign will work before investing valuable resources in an unsuccessful strategy.

All in all, for businesses looking to expand and grow, a better understanding of the Return on Ad Spend can help:

• Budget for future advertising campaigns
• Develop effective strategies that increase business exposure and elicit a better conversion from customers 
• Determine where to invest advertising budget
  
  

How to Calculate ROAS

Unlike other marketing calculations, it’s comparatively easy to calculate ROAS. There are two basic methods.

The first one follows a specific formula: ROAS = conversion value/ amount spent.

“Conversion value” measures the amount of revenue a business earns from a given conversion. 

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 of 476% or a ratio such as 4.8:1.

The calculation is quite simple. The limitation of the above equation is that it doesn't give brands a true sense of how many actual conversions they're getting from a campaign. 

When analysing ROAS this way it can cause confusion when the numbers become complex.

The second formula operates by subtracting the cost from revenue before dividing it by cost, as follows:

ROAS = (Revenue – Cost) / Cost

In this formula, a brand  takes the total revenue generated by their marketing components, subtracts what they paid to run their ads, and divides the result by their ad spend.

Some brands prefer the first equation over the second since it is more ROI-focused. However they're both viable. The essential thing is brands  know which model they're using and what it means for their business.

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, businesses 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 an enterprise. 

Calculating the ROAS for each will provide businesses with a measure of relative performance, letting them instantly see which of their campaigns are generating healthy returns and which are not.

Ideally, brands should be looking for the  ratio of their advertising revenue to their 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 calculating the ROAS for each campaign, businesses will see a spread that looks 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, the position of placement, size of an affiliate audience, time of day and see how they compare. 

It can be 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 businesses a sense of how effective each is 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 that need to address.

What Constitutes A “Good” ROAS?

Every brand's ROAS depends on their marketing goals and campaigns. This means it is difficult to define what a ‘good’ ROAS is. 

Usually, a ROAS of 4:1 is considered healthy which means a conversion of $4 on spending of every $1. Of course, this primarily depends on the campaign’s budget, conversions, profit margins, and overall marketing strategy. But the higher your ROAS, the better.

It is difficult to gauge what a “good” ROAS is for every business, some may require a $12:1 , while others may be able to thrive on a $4.1. 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 that a size fits all and it is worth considering that certain sectors will see a different ROAS. 

Looking at the ROAS across all digital marketing channels can help provide businesses with a benchmark to start with and then it is down to the business to determine what ROAS they wish to achieve for each channel. 

Thankfully, with Commission Factory’s Custom Commissions & Dynamic Commissioning, brands are able to set commissions for their affiliates, ensuring commissions are competitive, whilst also ensuring they are not paying  more than they can afford.

Additional Costs to Factor In Calculating ROAS

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

• Partner and vendor costs -  This includes all of the fees and commissions that need to be paid out to partners and vendors who work with brands 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 sent to an affiliate database or a banner placement on an affiliate site. It is often easily forgotten when calculating the overall ROAS.

These costs are easy to forget. If businesses neglect to include them in their calculations, they will not get an accurate representation of the efficacy of each ad campaign.

As with any marketing channel, first and foremost, KPI’s should be considered. The most commonly adopted KPIs for affiliate marketing are leads, conversions, conversion rate, and cost per acquisition (CPA). 

Brands cannot implement a successful affiliate marketing program without taking into account possible pitfalls and misconceptions. These can even hurt a brands’ ROI but are  easily avoided when businesses know what to look for and how to optimise and reward affiliates.

How to Optimise an Ad Campaign to Improve ROAS

If a brand determines that there’s room for improvement after calculating the ROAS, there are several things they can consider implementing in their Google Ads, Facebook ads, or shopping campaigns:

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 effective and attractive ads, businesses need to allocate employees, time, and money.
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), businesses need to analyse key metrics to determine what the conversion rate of each ad is, the number of sales that are generated, among other factors.
3. Comparing like for like: Different affiliate types and placements may have different ROAS and this should be considered when analysing data.

Better define the rules and policies. In order to build a strong and better relationship with affiliate marketers and advertisers, brands should establish 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 the metrics required for the calculations. Thus, brands get all the marketing metrics that measure the ROAS of affiliate campaigns easily.

To improve interest, brands can implement the following strategies:

• Approve affiliates to ensure that only the best marketers are representing and working with their 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 their program and earn a profit margin.
• Research the rates and benefits that their competitors are offering to ensure the program stays competitive and marketing efforts are not wasted.
• Offer two-sided programs with two commission rates. One rate for the public and one for top-performing marketers and networks. It’s best to avoid constantly changing commission rates, as disruptions and interferences can negatively impact affiliate relationships and conversions.
• Set up programs, so that affiliates are awarded when customers return and make additional purchases. This will ensure the affiliate program is a lot more appealing, as affiliate marketers can continue to earn a commission for their hard work and effort.

Maintaining an online business can be difficult. Knowing what the bottom line is integral for businesses to Understand how each advertising campaign is affecting their sales and can help determine which campaigns to keep and which campaigns to cut loose. 

The Return on Ad Spend is an effective tool for businesses in these situations, providing them with the analysis and reporting needed to make an informed decision that will better their profit margins in the long run.

Contact us today to learn more about affiliate and partner marketing.

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