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.

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.

What Is ROAS? How to Calculate Return on Ad Spend

Q: 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

Q: 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.

Q: 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.

Maintaining a profitable affiliate program requires being able to decipher what ROAS is. We outline the importance of ROAS in this article.

What Is ROAS_ How to Calculate Return on Ad Spend

Digital publishers and advertisers need a tight focus in their advertising efforts to better reach their target audience without going overboard on marketing budgets. This, in turn, means being aware of which campaign and which channel is the most effective in meeting their goals.

One of the most efficient ways of ensuring this is by optimising a metric known as return on ad spend (ROAS). One of the benefits of ROAS is that it enables advertisers to determine the return of every ad quantitatively.

So, by comparing the ROAS of one ad with another, they can effectively determine which is making a more favourable impact on the target audience.

Given that understanding ROAS can help advertisers understand the success of their marketing campaigns, let’s explore this metric in a little more detail to understand what it is, how to measure it, and how to judge what a good ROAs is.

What Is ROAS?

Return on ad spend (ROAS) is a marketing metric that refers to the revenue earned for every dollar spent on an advertising campaign.

ROAS allows advertisers to measure a specific ad campaign’s performance and shouldn’t be confused with return on investment (ROI), which is a bigger metric that tracks direct spending as well as operational expenditure. By determining how much they earned compared to how much they spent on the ad, advertisers can gain valuable insights that enable them to fine-tune their campaign strategy.

ROAS calculates how much advertising spend brands will need to commit on a specific ad campaign in order to generate a certain amount of revenue.

Why Is Understanding ROAS Important?

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

Letting an underperforming campaign run without adjustments can be a costly exercise. On the other hand, pausing campaigns too soon will prevent enough performance data from being collected. Once brands understand their ROAS across different advertising channels, they’ll be able to avoid both of the situations described above.

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 brands looking to expand and grow, a better understanding of ROAS can help:

Budget for future advertising campaigns
Determine which campaigns to invest in
Develop effective strategies that increase exposure

How to Calculate ROAS

The formula to calculate ROAS is simple - divide the revenue by the amount of money spent on ads.

The ROAS formula is as follows: ROAS = Conversion Revenue/Total Ad Spend

For example, if $1,000 is spent on an ad campaign in a month and the revenue generated from that campaign is $5,000, the ROAS is found by dividing $5,000 by $1,000. In this case, it’s $5.

ROAS is typically expressed as a ratio. So, it is 5:1 – which reveals that for every dollar that an advertiser spends on an ad, they earned $5 of revenue. This indicates they’re running a successful online campaign strategy.  

It’s easy to calculate the revenue earned if the advertiser correctly determines the total cost of an ad campaign. When determining that, ensure that all expenditure is included. It will include campaign creation cost – it costs more if an external agency is hired to do it – and the online platform’s cost, which varies from one to another. In addition to the cost of the ad platform, there are also additional costs, such as fees and commissions of vendors and affiliate partners.  

A higher ROAS is good news for advertisers. It indicates that they are able to generate more revenue out of every dollar spent on the campaign. Before starting a campaign, it’s best to determine the target ROAS, which varies from industry to industry. 

Additional Costs to Factor in When Calculating ROAS

When calculating each ad campaign’s ROAS, brands 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.

Calculating ROAS for Multiple Campaigns

When there are several campaigns running simultaneously, they all contribute clicks, sales, and revenue.

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

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 ROAS is highest for Campaign 4 and lowest for Campaign 5. It’s worth comparing the range of campaigns on messaging, placement position, affiliate audience size, and time of day to better understand how they compare.

Difference Between ROAS and ROI

Brands use return on investment (ROI) to assess the performance of their investment. It helps them understand how much profit or loss has been generated from their investment in a project or business.

One of the most commonly used methods to calculate ROI is net profit divided by the total cost of investment, and then multiplying that by hundred.

The formula looks like this: ROI = Net Income/Cost of Investment x 100

ROI is expressed in percentage. A ROAS calculation, meanwhile, is expressed as a ratio.

There are other differences between ROI and ROAS. The former helps understand the profitability of an investment, while ROAS enables advertisers to see whether an ad campaign is delivering results. ROAS looks at the revenue generated from an ad and not the profitability of the advertising expenditure.

Marketers use ROI to calculate the total return on their overall investment in an ad campaign, and use ROAS when they have to measure the return/success of a specific ad.

There is also another difference between ROI and ROAS. While ROAS helps gauge an ad’s performance, ROI has many other use cases. Brands can use it to measure a range of organisational investments, not just ad expenditure.

By using both ROAS and ROI, marketers can gain more in-depth insights, helping them create more effective online ad campaigns.

What Is a Good ROAS?

Determining what a “good” ROAS is depends on the business looking to measure it. Some may need a 12:1 ROAS, while others may be able to thrive on a 4.1 ROAS. There are several variables involved, such as the campaign's budget, conversions, profit margins, ad platforms, and overall marketing strategy.

As such, it’s important to understand the company's profit margins across their products and services, as well as the budget available for the channel.

Looking at the ROAS across all digital marketing channels can help provide brands with a benchmark to start with, before identifying the target ROAS 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’re not paying more than they can afford.

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:

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.
Focus on the right metrics: To calculate the ROAS and to determine the effectiveness of each ad campaign and its ROI, brands 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.
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 ad networks provide all the metrics required for the calculations.

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 aren’t 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 to reward affiliates 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 brands to understand how each advertising campaign is affecting their sales and can help determine which campaigns to keep and which campaigns to cut loose.

ROAS 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.

Final Thoughts

Advertisers spend thousands of dollars to create, run, and manage their online ad campaigns. Tracking and weighing advertising costs against the returns it generates is key to optimising performance.

Commission Factory works with more than 800 of the world's biggest brands and affiliates. Advertisers looking to improve their ad campaigns and generate more revenue in 2023, can get in touch with us. Alternatively, they can register as an affiliate or an advertiser on our platform today.

Connect with the Commission Factory team to learn more about how we help brands and content creators build and grow their affiliate marketing strategies.

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