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 your return on advertising spend (ROAS) has varying levels of complexity depending on the type of business that you’re a part of or the type of business that you serve.
With eCommerce businesses, for example, ROAS on your pay per click (PPC) campaigns with Google Adwords and Facebook ads is straightforward. But what about when you need to calculate it for subscription services? Or more complex B2B sales?
In this article, we briefly cover the basics of ROAS and how to calculate it (for those who are just beginning to learn about this important marketing metric), but we’re mainly here to discuss the nuances of calculating, troubleshooting, and communicating about ROAS in complex situations for more advanced marketers.
Feel free to use these links to navigate to the parts of this post that are most interesting and relevant to you:
- What is Return on Ad Spend?
- How to Calculate ROAS
- Calculate ROAS for Subscription Services
- Calculate ROAS for More Complex B2B Sales
- Can You Estimate ROAS?
- Example of When ROAS Could Be Off
- Communicating About ROAS with Clients
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?
ROAS is the go-to metric for determining the effectiveness of your online advertising campaigns. It allows you to see whether or not specific marketing efforts are working, and make intelligent decisions about how to best use your ad budget.
If you have an appropriately high ROAS, it’s a great indicator that a particular ad or series of ads is worth continuing to invest in. On the other side of the coin, if your ROAS is on the low end (often this means if it’s less than 1 and you’re losing money), it indicates that you either need to tweak your messaging, adjust your targeting, or possibly scrap your campaign all together.
What follows is a basic explanation of how the calculation works.
How to Calculate ROAS
In its simplest form, to calculate ROAS, you take the revenue generated from an ad and divide it by the amount you paid to run that ad.
ROAS = Revenue Generated From Ad / Expense to Run Ad
Let’s look at a simple example to demonstrate.
Say a hypothetical eCommerce company called Fancy Socks runs a Google Adwords campaign. The equation would work like this:
- Revenue Generated from Ad: Their socks cost $10 and they sell 100 pairs from their campaign for $1,000 of revenue.
- Expense to Run Ad: Their total expense to run the ad was $500.
- Calculate ROAS: $1,000 / $500 = 2.0
Fancy Socks had a return on their ad spend of 2x or 100%. Now that they have the ROAS data, they need to decide if they made sufficient profit and gauge the success of their campaign. Typically, you should at least use BER (Break Even ROAS) as a goal or baseline. BER would factor in the hard cost of the sock pack (say $3) and the sale price of the sock pack ($10). That would give you a profit margin of $10 – $3 = $7.
To calculate BER, use this equation:
BER = sale price / profit margin
So in the example above, $10 sale price / $7 profit margin = a BER of 1.42. So if ads are getting 2x ROAS, that is still a reasonable result because it is above the BER of 1.42.
Note: Regarding the expense to run the ad, in addition to the dollar amount you pay the advertising platform, you may also want to factor in the expenses tied to developing the creative and monitoring your campaigns once they’re live. But these elements of the expense will not be reflected in the reporting from Google or Facebook analytics.
For eCommerce businesses, because Google data feeds and Facebook ad pixels can pull in the prices of products easily, determining ROAS is more straightforward. But let’s look at the way calculating ROAS differs when applied to another common business model: subscription services.
How to Calculate ROAS for Subscription Services
The key distinction between calculating ROAS for eCommerce and ROAS for subscription services is that subscription services, by definition, indicate recurring revenue, usually on a monthly basis.
To account for this, there is an additional step to calculating ROAS: finding customer lifetime value (LTV). In other words, you must answer the question: On average, how many months do new customers subscribe for?
If you forget to account for LTV, your ROAS will come out looking low, in which case you will not be working with accurate information when you evaluate the effectiveness of your campaign. Let’s look at another example to show what we mean.
A hypothetical subscription service runs a Facebook ad campaign, and forgets to take into account LTV.
- Revenue Generated from Ad: Their subscription costs $10/month and they earn 5 new signups from their campaign for $50 of revenue.
- Expense to Run Ad: Their total expense to produce and run the ad was $150.
- Calculate ROAS: $50 / $150 = .33
As you can see, without including LTV, ROAS shows the company is losing money on their campaign. The alternative, for a more accurate ROAS, is to instead use this equation:
ROAS = (Revenue Generated From Ad x Number of Months on Average a Customer Subscribes) / Expense to Run Ad
Using this equation, the numbers come out differently:
- Revenue Generated From Ad: Their subscription costs $10/month and they earn 5 new signups from their campaign for $50 of revenue.
- Number of Months (on Average) a Customer Subscribes: 5 months
- Expense to Run Ad: Their total expense to produce and run the ad was $150.
- Calculate ROAS: ($50 x 5 months) / $150 = 1.67
Once LTV is factored in, the business can see that over time, and on average, this would be a profitable result (if a little low) from their campaign.
Now let’s have a look at a third case where calculating ROAS is a little more complicated — and sometimes inadvisable.
Calculate ROAS for More Complex B2B Sales
Think about these characteristics of a complex B2B sale and how they differ from a simpler eCommerce purchase or subscription service:
- The price tag is often significantly higher.
- The purchase requires more consideration from potential customers, and sales will naturally take more time to complete.
- Companies need to establish significantly more trust with their customers before a purchase is made.
- Companies might be making as little as 1-2 sales per month while still being profitable.
- The total revenue from different customers can vary dramatically.
For digital marketers running campaigns for B2B sales, focusing on ROAS as your metric of success often doesn’t make sense, for a couple of reasons. The first is an accuracy issue. Without being able to give Facebook or Google a singular value for a conversion up front, the platforms will not be able to report accurate ROAS data.
The other reason is that ROAS as a metric is a better fit for shorter term sales. Given the longer term nature of B2B sales, the initial goal should be a focus on relationships. This is why, especially when starting out, companies in this situation are better suited to focus on the metric of cost per lead (CPL) instead. Leads are what will lead to new relationships that may develop into new customers and sales.
Determining a reasonable CPL will depend on the industry and type of business at hand. And then it’s up to your company — or your client — to nurture the relationships, deliver the pitches, and convert leads into customers.
Over time, as you track how many leads are converting, and the average customer LTV of those leads, you can begin to dial down a rough ROAS value. Complete accuracy in these cases will always be difficult, but this data is valuable to track and will give you the best shot at determining what your ROAS is.
A Note on Qualifying Leads
When your focus is on lead generation in a B2B context, it is commonly the case that high quality leads will be more effective than a high quantity of leads. A high quantity of average or poor quality leads means wasted time and effort trying to form relationships with and pitch potential customers, many of whom aren’t seriously on the market for what you have to offer. And that results in a low ROAS — not exactly the kind of thing that impresses clients.
Quality leads, on the other hand, will lead to more conversions. And when they don’t convert, you’ve learned something from a potential customer that you actually see as a good fit for your product or service. It’s a win-win.
Even small tweaks to your process can make a difference. For example, if quality leads is your goal, and you’re using a questionnaire to collect information from prospective customers up front, you’ll have to choose between setting up a native lead form or a landing page lead form.
With Facebook, for example, a native lead form will create a pop up where the user can input their information on the spot. The benefit of this is that it’s easier for the user to sign up and you are likely to get a higher volume of leads.
However, by using a landing page lead form, where the user needs to click through to the landing page, they’ll need to invest more time and effort to fill out the form, which can often mean they’re a more serious candidate for you and a higher quality lead.
These are nuances to consider when you’re focusing on lead generation for more complex B2B sales.
Can You Estimate ROAS?
In some cases, prior to running a campaign, you or your client may want to know if it’s possible to estimate ROAS ahead of time. And it’s often possible to provide a range to work with based on past experience and/or research.
Let’s say you’re an agency and a new client comes along who offers a subscription SaaS service to a market-savvy audience. The first thing you’d do is ask, okay, have we served this audience or one like it before? What were the ROAS metrics we were seeing in those campaigns?
In addition, you’re going to ask your client for any data that they can provide you with that can help you hone in further on your estimate. Things like previous ad campaign data through search and social media, customer or email lists, and Facebook and Google Analytics history. With this type of information in hand, you can likely come up with a range for ROAS as a starting point.
If you’re a company running campaigns in-house, your best bet is to do your research through a combination of reviewing any of the data that you have, searching online, and talking to experts about their past experiences.
Example of When ROAS Could Be Off
While tracking metrics like ROAS with digital marketing is far superior to the days of direct mail, it is still an imperfect system and ROAS will inevitably come out not looking right at times.
Here is a short example of a ROAS metric not coming out right, and a workaround to troubleshoot it and land on a more accurate metric. The idea here is to make you aware of the types of things that can come up when calculating ROAS, and show you how to think like an experienced marketer when troubleshooting issues.
Example: Discovering a Slow-Loading “Thank You” Page
Let’s say you’re advertising on Facebook and using a landing page service like Instapage, but you notice there is a higher lead count in Instapage being reported than in Facebook. Ideally you would want these numbers to be equal.
First, you might go through and test the process yourself, to make sure that the Facebook pixel (strip of code that you add to the landing page so that it can communicate with Facebook) is firing properly.
When you sign up and click submit, you see that the thank you page is taking longer than you’d expect to load. And you realize that the issue could be that those who sign up are exiting the page before the thank you page loads, and thus the lead isn’t being communicated to Facebook.
One possible solution is to change how the pixel is recording a conversion from landing on the thank you page to clicking ‘submit’ on the form. While this wouldn’t normally be preferable, it’s unlikely that many people will click ‘submit’ without actually filling out the form. An adjustment like that should show more of an equal number of conversions recorded between Facebook and Instapage.
Reporting on ROAS with Clients
If you’re an agency, most clients just want to hear the top level information. The whole reason they’re hiring you is that they don’t want to be bogged down with the details of CPC and CPR.
When you’re reporting, it’s usually sufficient to simply summarize the results:
- Here’s what you spent
- Here’s what you got
- Here’s the ROAS at the end of the day
If the ROAS metric is down that month, share about what you found as to why, and what you’ll be trying next month to get it back up.
Calculating ROAS is an imperfect system, and it’s best to explain this to clients up front. As long as you establish strong relationships and a high level of trust with your clients, reporting on ROAS should be relatively straightforward and painless.
ReportGarden is launching a new product for marketing agencies to make reporting on ad campaign metrics (including ROAS) easier. Click here for more information.