Within digital marketing, many types of strategies can be followed.
In fact, more and more weight is being given to inbound marketing (publications on social media, driving traffic to your website, using email marketing, etc.), but it is undeniable that advertising campaigns are still a key element for many companies.
However, in order to know how the advertising campaigns we have in place, as well as those that have already ended, are working, it is necessary to be able to measure the results. This is where the KPIs come into play, indicators that we cannot lose sight of when we carry out a digital marketing campaign.
Among them, the metric par excellence to assess the effectiveness of a digital advertising campaign is the ROAS.
So, if you have an e-commerce and you are wondering what is ROAS in marketing, why it is so important and how you can calculate it, keep reading because in this post we are going to explain everything you need to know.
What is ROAS or Return On Advertising Spend?
ROAS stands for Return On Advertising Spend, which in Spanish translates as retorno de la inversión publicitaria.
But, beyond the meaning of ROAS, do you know how this metric can help you find out?
Quite simply.
ROAS tells you how much money you have earned for every euro spent on advertising.
Therefore, knowing this value will provide you with very valuable information to be able to make more accurate decisions and set a better budget for your digital strategy.
Why is it important to know the ROAS?
As we have already mentioned, ROAS will be one of the key metrics to know if the advertising investment you have made is being effective.
Calculating the ROAS will allow you to optimise your advertising budget by being able to boost those campaigns that are generating a higher return, as opposed to others whose ROAS is lower.
The goal of any advertising campaign on Google Ads, Facebook Ads or any other social ads platform is always to achieve the highest ROAS possible.
In short, controlling the ROAS of your campaigns has 2 main objectives:
Optimise your campaigns. Find out which products and which channels work best. Testing which sets of campaigns are generating a good performance provides you with the necessary information to decide which advertising formula you should promote and which should be stopped due to low conversion rates.
In other words, carrying out strategies based on campaigns with an optimal ROAS helps you to invest your budget wisely.
How do you measure the return on your advertising investment?
In general, the advertising platforms themselves already tell you what the ROAS is for each of your campaigns.
But just in case, in this section, we are going to show you how to calculate ROAS on your own.
Actually, the ROAS formula is very simple:
That is, to know the ROAS, the total sales revenue generated through the analysed campaign is divided by the investment made.
Unlike ROI, the expenses are limited to the amount spent on the advertising platform during the time you have kept the campaign active.
Practical example of ROAS calculation
As we did with ROI, we are going to simulate how to calculate ROAS with a fictitious assumption.
Following the same example we used in the post about ROI, let’s imagine that we have an e-commerce and that we have carried out a Google Shopping campaign to sell some trainers.
Throughout the campaign, 500 units were sold at €30 each. Therefore, the revenue was:
Revenue = 500 units x 30 €/unit = 15.000€.
And the expenditure on Google Ads amounted to €1,000.
Therefore, if we apply the formula to calculate the return on advertising investment (ROAS), itwe get:
This ROAS is spectacular (we warn you that it is not the usual) and indicates that the campaign has worked perfectly…
But, has it been profitable for the business?
The answer is that we cannot know this by analysing the ROAS alone, as it does not take into account the profit margin we have on the product sold.
To have this information, we have to rely on other metrics such as ROI.
Below we explain the differences between these two KPIs.
Main differences between ROAS and ROI
Before facing ROAS vs ROI, let’s remember what is the formula to calculate ROI:
In this case, the revenues are common in both formulas (ROAS and ROI), but the costs or expenses are different.
When we talk about ROI, costs include, in addition to advertising expenditure, the amount paid for the product or the cost of production, as well as marketing agency fees and any other expenses attributable to that product (sales channel maintenance, logistics, storage, etc.).
As you can see, ROI measures the actual profit you have made.
In other words, to measure the overall return on your investment (profitability), we use the ROI and to analyse the set of campaigns we have running on each platform we look at the ROAS.
To understand it better, let’s go back to the practical case we have exposed before, where the ROAS was 1,500%.
Let’s now calculate the ROI. To do this, we need some more data:
- Spending on Google Ads: €1,000.
- Price paid for the product: €10/piece.
- FEE agency: €500
Thus, the total costs amounted to €6,500.
Now, we apply the ROI formula:
And we obtain a result of 130.77%.
A priori we see that there is a big difference between ROAS (1,500%) and ROI (130%).
What does this mean?
How to interpret ROAS and ROI Looking at the ROAS data, it seemed that the campaign had been a great success.
Well, indeed, it was in terms of effectiveness.
But let’s try to answer that question that was left hanging in the air earlier: “has it been profitable for the business?”
The answer is yes, because the ROI is positive (130%), but not as much as it might seem based on the ROAS.
Why is this?
Surely the campaign was a success because the shoes were sold at a price well below the market price at the time.
But doing so came at a cost: the profit margin was greatly reduced.
The danger of doing this kind of strategy is that, if you don’t do it in a controlled way, you run the risk of ending up selling below the break-even point.
And that… is something that no business should do if it wants to avoid making a loss.
In summary, the main difference between ROAS and ROI is:
- ROAS gives us the percentage of revenue obtained in a campaign, i.e. it measures the gross revenue generated for each euro invested in advertising.
- ROI gives us the percentage of real profitability, that is, it allows us to compare the amount earned once the total costs have been subtracted.
Are you already clear on what ROAS is and how to interpret it?
We hope you do.
Controlling the ROAS of your campaigns will allow you to optimize your budget, betting heavily on those variants that are giving the best results.
But always remember to also calculate the ROI to confirm that the operation is being profitable.
It is no use having a high ROAS if your margin is so low that it is not enough to cover all your costs. This can happen, for example, with high-priced products that generate a lot of revenue per euro invested in advertising, but whose margins are so low that they are not enough to cover all costs.
That is why it is so important to always evaluate these two KPIs together.
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Check out the results our customers are getting thanks to Boardfy in their Google Shopping campaigns:
- More revenue (15-20% increase in sales).Item 2
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