To maximise their visibility and sales, many companies invest in advertising. But the cost of advertising is often considerable. And the return on investment isn't always there. That's precisely why it's so important to measure ROAS.
So what is it? How is it calculated? What’s the point of this method? Find out the answers.
What is ROAS?
Definition of ROAS
ROAS stands for Return On Ad Spend. In other words, return on advertising investment. This is a way of measuring the sales generated by each expenditure on advertising.
This is one of the most relevant indicators for marketing professionals. And with good reason: while advertising remains one of the best levers of visibility, companies are also paying increasing attention to their spending. In fact, in the United States, 49% of companies are halting or suspending their advertising budgets.
Why such a decision? The economic context is undoubtedly partly responsible for this choice. But it is not the only reason. Performance concerns are driving companies to review their strategy. Particularly when it comes to advertising, since the benefits of advertising are extremely variable.
So how do you make sure you get the maximum return? All you have to do is monitor your ROAS. The idea is to identify the most profitable marketing channels and strategies, and thus avoid “useless” expenditure.
Good to know: ROAS measures the effectiveness of ALL advertising activities. This includes the cost of traditional advertising (cinema, television, radio, etc.), advertising on search engines and social networks, as well as content marketing.
ROAS et ROI
ROAS is very similar to ROI, but the two concepts should not be confused. ROI (Return On Investment) measures the effectiveness of all the company’s activities (marketing, sales, logistics, organisation, etc.).
ROAS, on the other hand, is limited to calculating the euros generated exclusively by advertising activities. It is therefore only a small part of the ROI. In this respect, return on advertising investment is mainly of concern to marketing experts, whereas ROI is mainly studied by decision-making bodies and the finance department.
How do you calculate ROAS?
Calculation method
To calculate the return on advertising investment, simply follow the formula below:
ROAS = sales generated through advertising / total advertising costs
To help you understand, here’s an example:
Expenditure on advertising campaigns: €5,000
Sales generated by advertising: €15,000
In this case, the ROAS is 15,000 / 5,000 = 3
For every €1 invested, the company generates €3.
Good to know: don’t forget to define a precise period for calculating the ROAS. This could be a month, a quarter, 6 months or a year. We advise you to select several months, as advertising campaigns generally take a long time to produce results. Between lead generation and the sales cycle, which can take a long time, you need to allow at least 3 to 6 months. If you choose too short a calculation period, you won’t necessarily see the correlation between the expenditure incurred and the revenue generated.
Factors to be taken into account
While the ROAS formula is relatively simple, it is important to specify the elements to be included in these two variables:
- Sales generated through advertising: you should only select sales generated through advertising activities, such as a lead buying via your website. On the other hand, the sale to a prospect by the sales rep (only) should not be included in the calculation.
- Total advertising costs: these are direct and indirect expenses. For example, expenditure on Google Ads, Facebook Ads, fees for subcontractors involved in the project, employee salaries in relation to time spent on campaigns, etc.
Good to know: there is no right or wrong ROAS. It depends on a multitude of factors, such as the sector of activity, the type of content, the communication channel, etc.
Things to remember
- ROAS refers to return on advertising investment. In other words, the gains obtained for each euro spent on a paid advertisement.
- Not to be confused with ROI, which is the return on investment for all the organisation’s activities.
- When launching an advertising campaign, every company’s objective is to obtain the highest possible ROAS.
- To achieve this, they need to improve their customer knowledge.
