The Complete Guide to Calculating Return on Ad Spend (ROAS)

Are you pouring money into online advertising but struggling to tell if it‘s actually driving revenue for your business? You‘re not alone. According to a survey by HubSpot, 40% of marketers say proving the ROI of their marketing activities is their biggest challenge.

The good news is, there‘s a key metric that can help you cut through the noise and accurately measure the effectiveness of your ad campaigns: Return on Ad Spend, or ROAS.

In this ultimate, step-by-step guide, we‘ll demystify ROAS and show you exactly how to track, calculate, interpret and optimize it to stretch your ad dollars further. From the basics of the ROAS formula to advanced predictive modeling, we‘ve got you covered.

By the end of this monster 2500+ word guide, you‘ll be armed with the knowledge and tools needed to turn your ad campaigns into well-oiled, revenue-generating machines. Let‘s dive in!

What is ROAS?

First things first, let‘s define what ROAS actually is. Here‘s the official definition:

Return on Ad Spend (ROAS) is a marketing metric that measures the amount of revenue earned for every dollar spent on advertising.

In other words, it shows you how much bang you‘re getting for your buck from your ads. It‘s calculated by dividing your total conversion value (revenue from ads) by your advertising costs.

For example, if you spent $100 on a Facebook ad campaign and it generated $500 in revenue, your ROAS would be 5 ($500 revenue / $100 ad spend), or 500%. For every dollar you put in, you got five dollars back out.

While Return on Investment (ROI) measures the return on your total investment (all costs involved), ROAS only looks at the return on your ad spend. This makes it especially useful for ecommerce brands and performance marketers focused on driving direct sales from their digital ad campaigns.

Why is ROAS Important? 4 Key Benefits

You might be thinking, "We already track metrics like cost per conversion and conversion rate. Why do I need to calculate ROAS too?" Here are four big reasons:

1. Prove the value of your ad campaigns
   According to Google, the average ROAS across industries is 2:1, or 200%. This means most businesses are doubling their money on ads. Reporting on your ROAS helps you communicate the true monetary impact of your campaigns to clients and leadership. If you‘re consistently driving a 500% or higher ROAS, you have a strong case for increasing your ad budget.

2. Optimize for what really matters: revenue
   Clicks and even conversions are great, but at the end of the day, you need your ad campaigns to drive real revenue and profit. Tracking ROAS shifts your focus to the quality of conversions, not just the quantity. You can identify and double down on campaigns that bring in actual dollars.

3. Make data-driven decisions about ad spend
   By calculating your ROAS, you can determine exactly how changes in your ad spend affect your revenue. This allows you to set ROAS goals and adjust your bids, budgets, and targeting to hit them. You‘re no longer flying blind with your ad spend.

4. Benchmark and improve ad performance
   Consistently tracking ROAS lets you see if your campaigns are improving or declining over time. A sudden drop in ROAS can alert you to issues with your website, product, or ads themselves. You can also see how you stack up against average ROAS benchmarks in your industry.

ROAS Formula: How to Calculate It

Now that you‘re sold on the importance of ROAS, let‘s walk through exactly how to calculate it. The basic ROAS formula is:

ROAS = Conversion Value / Advertising Costs

• Conversion value: The total revenue generated from a specific ad campaign or channel. It‘s critical that this revenue is directly attributable to the ads, and not conflated with income from other sources.
• Advertising costs: The total amount spent on the ad campaign, including the ad spend itself, agency fees, and ad production costs.

To express ROAS as a percentage, simply multiply the result by 100. The formula for ROAS percentage is:

ROAS % = (Conversion Value / Advertising Costs) 100*

Let‘s calculate ROAS in a real example. Say you‘re an ecommerce store owner who spent $5,000 last month on Google Shopping Ads. The ads brought in $25,000 in directly attributable revenue.

Your ROAS would be:
$25,000 revenue / $5,000 ad spend = 5

And your ROAS percentage would be:
5 * 100 = 500%

In this case, your Google Shopping Ads generated $5 for every $1 spent, a 500% return on ad spend. According to Wolfgang Digital‘s 2020 KPI Report, the average ROAS for ecommerce Google Ads is 5.58, so this would be right on par with industry benchmarks.

How to Set Up ROAS Tracking: 3 Key Steps

Of course, to report on and optimize for ROAS, you first need to set up proper tracking. Here‘s a quick three-step process to get started:

1. Set up ecommerce tracking in Google Analytics
   This will allow you to track transactions and revenue from your website in one place. Go to Admin > Ecommerce Settings, enable ecommerce, and add the tracking code to your site.

2. Create conversion goals and values
   In your Google Ads account, create conversion actions for key events like purchases and assign them monetary values. For non-purchase conversion types, estimate their value based on factors like average order value and close rate.

3. Link your ad accounts to Google Analytics
   This will import your cost data so you can analyze ROAS by campaign, ad group, and more. Go to Acquisition > Google Ads > Campaigns and enable auto-tagging.

For a more detailed walkthrough, check out Google‘s guide to setting up Google Analytics for ROAS tracking.

ROAS Benchmarks by Industry and Channel

Your ideal ROAS goal will depend on factors like your industry, profit margins, and cost of goods sold. That said, here are some average ROAS benchmarks by industry from the 2022 Google Ads Industry Benchmarks Report:

According to this data, businesses in the arts and entertainment vertical saw the highest average ROAS from Google Ads at 569%, followed closely by food and drink brands at 545%. Retail and beauty also had strong showings in the 500% range. More competitive industries like legal, automotive, and home and garden lagged behind with sub-400% ROAS averages.

Facebook ROAS benchmarks tend to be a bit lower than Google, since the platform is used more for prospecting than bottom-of-funnel direct response. According to research by Wordstream, the average conversion rate across Facebook ad accounts is 9.21%, but the average cost per purchase was $18.68, resulting in a blended ROAS of around 300%.

How to Optimize ROAS: 5 Proven Strategies

Getting a good baseline ROAS with a new ad account is great, but how can you optimize your campaigns over time to keep pushing it higher? Here are five tips:

1. Segment your ROAS analysis
   Don‘t stop at overall account ROAS. Dig into your data and calculate ROAS for each campaign, ad group, ad, and keyword. This will show you exactly where to cut wasted spend and allocate more budget for maximum ROI impact. For example, WordStream found that the top 10% of Adwords accounts achieved 6x higher ROAS than the average simply by optimizing their high ROAS campaigns.

2. Implement tiered retargeting
   Analyzing your ROAS by audience can reveal opportunities to get more conversions out of your existing ad clicks. For example, you might find that visitors who viewed a product page have a 2x higher ROAS than your account average. Creating a targeted remarketing campaign for those high-value audiences can boost ROAS by serving them more relevant ads.

3. Refine your targeting
   A high CTR is worthless if you‘re attracting the wrong clicks. Use your ROAS data to evaluate which target audiences, demographics, and placements are actually leading to revenue. Consider raising bids and budgets for high ROAS segments while excluding or refining low-value targeting criteria.

4. Optimize for quality scores
   The higher your click-through rates and landing page experience, the higher your Google Ads Quality Scores will be. A 10/10 Quality Score can reduce your CPC by up to 50% compared to a 5/10 score, massively increasing your ROAS.

5. Scale winners with automation
   Once you identify high ROAS campaigns, set up automated rules to increase budgets and bids when performance is strong. For example, you might create a rule that raises daily budget by 15% week-over-week for any campaign with at least a 500% ROAS until you hit your efficiency goal.

Case Study: How The Ridge Wallet Tripled ROAS with Segmentation

To illustrate the power of some of these strategies, let‘s look at a real ROAS optimization case study from the DTC ecommerce brand The Ridge Wallet.

After launching their new online store, The Ridge‘s Google Ads ROAS averaged around 200-300%. To improve it, the growth marketing team at Common Thread Collective helped them implement the following:

• Detailed ROAS analysis by campaign, ad group, and keyword
• Tiered retargeting to site visitors and customers
• Strategic use of single keyword ad groups (SKAGs)
• Bid optimization toward high-value keywords and audiences

After three months of systematic ROAS optimization, The Ridge saw:

• Sitewide ROAS improve from 2.64 to 8.53 (a 223% increase)
• Non-branded search ROAS improve from 2.69 to 5.32 (a 97% increase)
• An 86% increase in total revenue

By making data-driven decisions based on ROAS insights, The Ridge nearly tripled the efficiency of their ad spend. You can read the full Ridge Wallet case study here.

ROAS Deep-Dives: 3 Advanced Concepts

Once you‘ve mastered the basics of ROAS optimization, consider applying these advanced concepts to take your analysis to the next level:

1. Marginal ROAS
   Rather than just looking at average ROAS, marginal (or incremental) ROAS measures the performance of each additional dollar of ad spend. For example, increasing your daily budget from $50 to $100 might generate an additional $200 in revenue, representing a 4:1 marginal ROAS, even if your overall ROAS is lower. Marginal ROAS can help you identify opportunities to profitably scale spend.

2. Profit-Adjusted ROAS
   Revenue is great, but what about profit? Profit-adjusted ROAS accounts for your margins to give a more accurate picture of bottom-line impact. The simplest formula is:
   Profit-Adjusted ROAS = Profit / Ad Spend
   Where Profit = Revenue – Cost of Goods Sold
   Analyzing profit-adjusted ROAS can reveal which high-revenue campaigns may actually be less profitable due to high costs, and which lower-revenue campaigns with high margins should get more spend.

3. Customer Lifetime Value-Based ROAS
   If you have repeat purchase behavior, your return on ad spend shouldn‘t just come from the first conversion. Calculate the lifetime value (LTV) of a new customer acquired through your ads, and you might find you can afford a much lower initial ROAS target.
   For example, if your average customer LTV is $500, a campaign with a 200% immediate ROAS ($50 CPA on a $100 initial purchase) may still be very profitable in the long-run. Incorporating LTV into your ROAS goals can help you invest in the right acquisition channels.

Conclusion and Additional Resources

We covered a lot of ground in this ultimate guide to ROAS, but the main takeaways are:

• ROAS measures the return on ad spend and is a critical metric for proving and improving the direct revenue impact of your campaigns
• You can calculate ROAS by dividing total conversion value by ad costs
• Set up conversion tracking and connect your ad accounts to Google Analytics to accurately measure ROAS
• Analyze ROAS at the most granular levels to make data-driven optimizations like refining targeting, implementing retargeting, and adjusting bids and budgets
• ROAS benchmarks vary widely by industry and ad network, but a good general target is 300-500%
• Advanced ROAS concepts like marginal ROAS and profit-adjusted ROAS can uncover additional optimization opportunities

Want to learn even more about mastering ROAS? Check out these additional resources:

• PPC Hero‘s Complete Guide to ROAS
• Google‘s Recommendations for Improving ROAS
• 5 Advanced PPC ROAS Tips for 2023

Now you‘re ready to measure, analyze, and skyrocket your return on ad spend like a true data-driven marketer. The next step is simple: pull up your ROAS reports and start optimizing!