ROAS, another acronym within the universe of terms and anglicisms of Digital Marketing. This metric, without being as “famous” as the CPC, the CTR or the KPIs, is the same or more important if possible when it comes to analyzing the profitability of your advertising campaigns. Are you not sure what ROAS is, how to calculate it or what is your target ROAS? In the following article, we will tell you.
ROAS is the acronym that refers to Return Of Advertising Spent or what comes to be the Return on Advertising Investment. ROAS tells us what gross profit I get for each euro invested in campaigns. It is a key metric with which to set KPIs based on whether it is equal to or greater than X, which will indicate if we are making money (or enough money) with our campaigns. Hence the importance of defining a target ROAS.
How ROAS is calculated
In order to calculate ROAS, it is important to know the value generated by the target conversions of the campaign to be analyzed. In the case of e-commerce, the answer is obvious, the value will be equal to the price of the products or services being sold.
If your campaigns are focused on capturing leads, you should set an average value to that lead. And how to calculate that value? Think about the average ticket you sell to leads that enter the web. Suppose you sell a service valued at € 500. Then you calculate what percentage of leads of all those you get ending up buying from you. Let’s say it’s 10%. The value that we would assign to each lead obtained would be € 50.
With this example, you would have an approximate value. If we want to calculate it exactly, offline conversions will have to be configured in our campaigns.
To calculate ROAS, we must divide the income generated by the campaigns by the investment made.
(Income / Investment) x 100
Let’s take an example:
We invested € 5,000 in Google Ads, with which we managed to sell 700 products that have generated a total of € 55,000.
ROAS would be (55,000 / 5000) x 100 = 1100%
This percentage tells us that we have obtained a return of € 11 for every euro invested.
Calculate your target ROAS
Within Google Ads, there is a type of automatic bid based on your target ROAS. You mark what ROAS you want to get in a campaign, and Google automatically adjusts the cpc bids to get to that target ROAS. For this, you must have a history with a minimum of conversions so that Google can optimize the bids automatically (this is what is called smart bidding bids)
To establish what minimum ROAS your campaigns need, you must put the benefit back on the table you get from each product or service you sell and the maximum cost per conversion that you can afford to continue obtaining benefits by generating sales of that product. Once that maximum conversion cost is defined, you can calculate the minimum ROAS with which to get benefits.
Differences between ROAS and ROI
To finish, you should bear in mind that ROAS is not the same as ROI. If with ROAS you get the return on advertising investment (how much do you get for each euro invested), with ROI we get the return on investment considering all the attributable expenses, not just the campaign investment.
(Income – Costs)/Costs
These costs should include not only the investment in the campaign but the costs of transporting the product, the cost of managing the campaigns charged by the agency or the internal employee, etc.
It is, therefore, a somewhat more complex metric to calculate accurately since many factors come into play that could be credited as cost. Even so, it is crucial to define it well because it will give us a much more approximate figure on whether our actions are being profitable or not.