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4. What is Return on Ad Spend? Calculating ROAS, CPA, and ROI

What is Return on Ad Spend? Calculating ROAS, CPA, and ROI

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Definition:
ROAS, or “return on advertising spend,” is a metric for measuring the effectiveness of ad campaigns. It specifically refers to the revenue made in relation to the advertising costs spent. ROAS can also be understood as the ROI, or return on investment, for advertising.

What is Cost Per Acquisition (CPA)?

Cost Per Acquisition (CPA) is a marketing metric that measures the cost of acquiring one conversion from an advertisement. A “conversion” is anytime a customer makes an action, like making an inquiry or purchasing something on your website.

CPA formula

CPA = Total Advertising Cost ÷ Number of Conversions

For example, if you spend \$3,000 to run an advertising campaign on both Facebook and Google, and receive 50 conversions from this ad, then your CPA is \$60. If only 20 conversions were generated from this ad, you would have a CPA of \$150. So the higher the CPA, the more it’s costing to receive one inquiry (or order).

Why is CPA an important metric?

CPA allows you to easily measure the effectiveness of advertising campaigns, and compare the ROI on different channels. For example, if you find that the CPA on Facebook is much lower than on Google, then you may want to invest more of your budget into Facebook ads.

What is considered a good CPA?

What can be called a quality CPA really depends - there is no universal benchmark for CPA. But you can determine whether it’s a good result by considering the following factors.

• How big of a priority is your profit margin? Can you sacrifice some profit for the sake of brand awareness?
• How large is your marketing budget to begin with?
• How are you defining the conversion? (Inquiries are more difficult to receive than an email subscription, and thus the CTR would naturally be lower).

What is ROAS?

ROAS formula

For example, if you spent \$500 on an ad campaign, and received \$1,250 in revenue, the ROAS would be 2.5. In this case, the higher ROAS turns out to be, the higher the profit made from the advertisement.

Why is ROAS an important metric?

ROAS is a critical metric for businesses running advertising, as the main method for calculating the profitability of ads. By evaluating how much your ads are contributing to your ultimate revenue, you can share this with the rest of your team and use this data as grounds to expand the marketing budget.

What is considered a good ROAS?

Like CPA, the quality of your ROAS score depends on a wide range of factors, from profit-margin to industry. However, most companies aim for a 4:1 ratio, or \$4 back for every \$1 spent on ads. Keep in mind, though, that the average ROAS score is only 2:1, or \$2 in revenue for ever \$1 spent.

What is ROI?

ROI, or “return on investment,” is a concept that’s not exclusive to ads, and instead is a global metric used to calculate the final revenue after taking into account every single cost. By every cost, this means aside from what you invest in marketing, you have to factor in the human resources cost, technology cost, and so on.

*Note that ROI can also be used to measure total revenue made from ads. ROI still differs from ROAS in that ROAS is a calculation of the average revenue made from ad campaigns, whereas ROI is the gross revenue made from ads.

ROI formula

(ROI = Net Income ÷ Total Cost of Investment) x 100%

This is a very simple example, but if you ran a lemonade stand for one day in the summer, and spent \$5 gathering the tools (lemons, poster board, plastic cups), and made \$35 by the end of the day, then your ROI is 500%.

Why is ROI an important metric?

ROI lets you know the bottom line profitability of a business, and so of course, it’s essential to be aware of your ultimate ROI. In addition, you can better understand how different areas of your business are contributing to the final revenue. Like if you place ROAS and ROI side by side, then you can see how much advertising makes up the gross revenue.

What is considered a good ROI?

As long as the ROI turns out to be a positive value, then you know that your investments are profitable to some extent. On the other hand, if your ROI comes out to be a negative percentage, then you’re spending more on costs than you’re earning.

ROAS, CPA, and ROI - Calculation Example

Here’s another example so that you can get a better idea of how to calculate all of the metrics we introduced above.

Let’s say that you’re a manufacturer of cosmetics and you ran a shopping ad on Google.

• Your company has a corporate site, ecommerce site, and a service site
• The total cost for the ad campaign was \$10,000
• The price for one eye shadow palette was \$75
• The profit made for every palette was \$30
• The total items sold via advertising was 2,000

Based on this result, the cost to sell one product is \$10,000 ÷ 2,000 products sold, resulting in a CPA of \$5.

The sales revenue from advertising is (\$150,000 ÷ \$10,000) × 100%, so the ROAS is 150%.

The gross revenue from advertising is (\$59,000 ÷ \$10,000) × 100%, so the ROI is 590%.

Conclusion

Though marketing metrics can seem intimidating at times, in reality, it only takes a simple calculation to find out the profitability of your ad campaigns. My advice to you is to make a habit of continually tracking these metrics, and use ROAS and CPA to determine which advertising channel is reaching the most customers. Then, of course, adjust your marketing strategy to focus on the channels that get the best results.

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