In writing this article, we consulted with Adam Dolan, founder of First Spark Digital. We’d like to thank Adam for sharing his time, knowledge, and expertise on this topic!
Calculating ROAS in B2B and SaaS sales can be quite challenging. With numerous touchpoints, lengthy sales cycles, and intricate customer journeys, it's easy to feel overwhelmed. In fact, reports show that the average sales lifecycle for B2B can stretch up to 8 months, further complicating the process.
This often leads to inaccurate assessments of marketing effectiveness and wasted budget allocations. In this article, we’ll show you how to calculate ROAS effectively. We’ll break down the process into clear, manageable steps and provide practical examples and tools specifically designed for B2B sales, making reporting easier and more efficient.
ReportGarden is launching a new product for marketing agencies to make reporting on ad campaign metrics (including ROAS) easier.
What is Return on Ad Spend?
Return on Ad Spend (ROAS) is a key performance metric that measures the revenue generated for every dollar spent on advertising. It helps businesses assess the effectiveness of their ad campaigns by calculating the relationship between ad spend and the revenue produced. For instance, if you spend $1,000 on advertising and generate $4,000 in revenue, your ROAS would be 4:1. This means you earn $4 for every dollar spent on ads.
What is a Good ROAS?
A good ROAS can vary depending on the industry and specific business goals, but a general benchmark is a ROAS of 4:1 or higher, which indicates that for every dollar spent, you’re earning 4x in return.
However, it’s crucial to consider factors such as profit margins, customer lifetime value, and sales cycle length when evaluating what constitutes a good ROAS for your business. Understanding these nuances will help in an effective ROAS calculation and help optimize ad spend for better results.
To ensure you look at the ROAS in the right manner, consider comparing it to the industry benchmarks. For instance, a study by Nielson revealed that the average ROAS across all industries is 2.87:1. This means that for every dollar spent on advertising, the company will make $2.87.
Difference Between ROAS and ROI?
To effectively assess your advertising performance, it's important to understand how to calculate ROAS and how it differs from other key metrics like ROI. Here's a quick comparison between ROAS and ROI to help clarify their distinctions.
Example of ROAS Calculation vs. ROI Calculation
Let's say a company spends $5,000 on a digital advertising campaign and generates $20,000 in revenue from that campaign. To calculate ROAS, you would use the formula:
ROAS Calculation Formula: Revenue from Ads / Ad Spend
ROAS = $20,000 / $5,000 = 4
This means the ROAS is 4:1, indicating that for every dollar spent on advertising, the company earns four dollars in revenue.
Now, let’s look at the same company’s overall profitability from the advertising campaign. If the total cost of the advertising campaign (including production costs, creative fees, etc.) is $7,000, and the total revenue generated is still $20,000, the net profit would be:
Net Profit = Total Revenue - Total Costs
Net Profit = $20,000 - $7,000 = $13,000
To calculate ROI, use the formula:
ROI = (Net Profit / Cost of Investment) x 100
ROI = ($13,000 / $7,000) x 100 = 186%
This indicates that your efforts are boosting the total return on investment made in the advertising campaign. To further improve ROI, focus on optimizing your ad spend and refining your targeting strategies.
Learn More: 6 Digital Marketing Metrics That Drive ROI In 2024
How to Calculate ROAS for B2B SaaS Sales
After the generic ROAS calculation, let’s now look at how to calculate ROAS in different cases under B2B SaaS sales.
General Calculation of ROAS for B2B Sales
The basic formula for B2B ROAS remains the same as in other contexts:
ROAS = Ads Revenue / Ad Spend
However, in B2B environments, it's crucial to consider longer sales cycles and multiple touchpoints that can impact your calculations.
ROAS for Long Sales Cycles
In B2B sales, sales cycles can be quite long. It often takes time for business leads to convert into customers. So, when calculating ROAS, it’s important to consider the entire sales process.
For example, let’s say you run an ad campaign to promote a SaaS software solution. You might attract leads today, but they may not convert for several months. To get an accurate ROAS, track how much revenue those leads generate over time.
This means looking back at the initial ad's impact even after months or years. By doing this, you can better understand the true value of your advertising efforts and how they contribute to long-term revenue.
Pro Tip: To effectively manage your ROAS for long sales cycles, consider using Google Ads metrics. This will help you identify key metrics including ROAS to track and analyze, ensuring you make informed decisions throughout the sales process.
Adjusting ROAS for High-Value Deals
B2B transactions often involve high-value deals, and thus, your ROAS calculation may need to reflect this. Instead of focusing solely on short-term gains, consider incorporating the lifetime value (LTV) of a customer into your ROAS analysis. This will give you a more comprehensive view of how well your ad campaign is performing in the long run.
Multi-Touch Attribution and ROAS
Using multi-touch attribution models can really boost your understanding of B2B ROAS. Instead of giving credit to just one touchpoint, these models show how multiple ads and interactions influence a customer's decision.
Here’s why this matters:
- Get the Big Picture: You’ll see the whole customer journey. This helps you understand how different channels work together, from awareness to purchase.
- Spot What Works: By assigning value to each touchpoint, you can identify which ads or content drive conversions. This insight shows you what really impacts sales.
- Smart Budgeting: Knowing which touchpoints deliver the best results lets you allocate your ad spend wisely. Shift your budget to high-performing channels to improve your ROAS.
- Keep Improving: The insights from multi-touch attribution help you refine your strategies over time. Adjust your messaging and targeting based on what resonates with your audience.
In short, multi-touch attribution gives you a clearer picture of your buyers’ journeys and marketing campaigns. It lets you optimize future ad campaigns for better performance and higher returns.
Customizing ROAS by Targeting Different Stages
When strategizing your ROAS, it’s essential to customize your approach for different stages of the sales funnel.
Why?
Because not all leads are created equal, and each stage in the funnel has its own unique needs and characteristics that influence their behavior.
For example, in the awareness stage of your B2B SaaS product, you might attract a broad audience with blog posts or webinars. Here, your ad spend should be modest, focusing on engaging content to generate leads.
As leads move to the consideration stage, they’re evaluating options. This is where you ramp up your budget to showcase customer testimonials and case studies. Investing more here can boost your ROAS, as these leads are closer to converting.
Finally, in the decision stage, use retargeting campaigns for those who visited your pricing page but didn’t buy, for example. Offering a limited-time discount can motivate these leads to convert, maximizing your ROAS.
Also Read: Unlock Success: Marketing ROI Strategies
Examples of when ROAS could be off
Calculating ROAS for B2B sales can sometimes lead to misleading results. Here are a few scenarios where your ROAS might not accurately reflect the true performance of your ad campaign:
Seasonal Sales Fluctuations
In B2B sales, you might run campaigns targeting specific industry events or trade shows. If your ads generate a spike in revenue during these events, it may look like a huge success.
However, once the event is over, sales might drop significantly. This seasonal variation can skew your ROAS calculations, making it seem like your ads are more effective than they are over time.
Pro Tip: To counter this, consider averaging your ROAS over several months, especially surrounding key events, to get a clearer picture of your campaign's performance. This can help you understand how to measure ROAS effectively in varying contexts.
Long Sales Cycles
B2B sales often involve lengthy sales processes. If you’re calculating ROAS based only on immediate sales, you might overlook the value of leads that take longer to convert.
For instance, if your ads attract leads who don’t make a purchase for several months, your current ROAS will under-represent the actual revenue generated from those efforts.
Example: Let’s say you spent $10,000 on ads that initially brought in $15,000 in sales in the first quarter. Your ROAS looks solid at 150%. However, if you later discover that an additional $25,000 in sales came from those leads over the next six months, your initial ROAS doesn’t capture the full impact of your advertising.
Overlooking Customer Lifetime Value (CLV)
Focusing solely on immediate sales can lead to a miscalculated ROAS. In B2B sales, acquiring a customer may involve upfront costs that seem high.
If you spend $5,000 on ads to acquire a customer who initially makes a purchase of $3,000, your ROAS may look poor. However, if that customer continues to buy or upgrades to a premium plan from you over the next few years, their true value far exceeds your initial calculation.
More Resources: Free PPC Budget Calculator That Actually Helps You Calculate a Budget
Attribution Errors
In B2B SaaS, multiple channels often contribute to a single sale. If you only look at the last ad clicked before a purchase, you might miss the influence of earlier touchpoints. For instance, a lead might see your email campaign, then engage with a retargeting ad, and finally convert after visiting your website.
If you attribute the sale solely to the last ad/touchpoint, your ROAS calculation will be skewed.
Pro Tip: Implement multi-touch attribution models to capture the contributions of various channels, giving you a more accurate ROAS assessment. You can also use a free ROAS calculator to help analyze different touchpoints and their contributions.
Reporting ROAS for Clients with ReportGarden
FAQs
- How do you improve your ROAS?
To improve your ROAS, start by analyzing your ad spend and optimizing your ad campaigns. Focus on targeting the right audience, refining your messaging, and adjusting your bidding strategies. By using data insights, you can concentrate on channels that yield the highest ad revenue. Moreover, use a free ROAS calculator to track performance and make real-time adjustments to maximize your returns.
- Why does the ROAS calculation matter?
Calculating ROAS is crucial for assessing the efficiency of your marketing campaigns because it reveals how much revenue you earn for every dollar spent on ads. This insight guides your budget decisions, allowing you to allocate resources effectively. A high B2B ROAS indicates that your strategies are working well, while a low ROAS suggests the need for improvements.
- What’s the difference between ROAS and ROI?
ROAS focuses specifically on the revenue generated from your ad campaigns versus your ad spend. On the flip side, ROI looks at total profit and includes all costs involved in a campaign, giving you a broader picture of your investment's effectiveness.
- When to use ROAS vs. ROI
Use ROAS when you want to evaluate the performance of specific ad campaigns or marketing efforts, especially in B2B contexts where you can directly link sales to ads. On the other hand, use ROI to assess the overall profitability of business initiatives, as it considers all associated costs.
Understanding when to apply these metrics enables you to calculate your current ROAS, set meaningful ROAS goals, and ultimately enhance the effectiveness of your marketing campaigns.
