The concept of machine learning has mixed connotations, though it has come a long way since the days of The Terminator. The use of machine learning through Google Smart Bidding promises easy and effective bidding, and it isn’t just for retail businesses. Google’s Smart Bidding is able to be used incredibly effectively by B2B/SaaS clients […]
What is Return on Ad Spend (ROAS)?
ROAS is a valuable metric that indicates the overall profitability of your paid media efforts. A higher ROAS means that you’re generating bigger returns on each advertising dollar, driving your company to profitability, and accumulating the financial resources you’ll need to continue scaling your business at a fast pace.
ROAS is very similar to another digital marketing metric known as Return on Investment (ROI). But while ROI may be used by everyone from bankers to business leaders to measure the efficiency of an investment, ROAS is used exclusively to measure the efficiency of paid media spending.
In your Google Ads account, you can automatically measure and track ROAS for your entire account, at the campaign or ad-group level, or even for individual ads.
Why is Return on Ad Spend (ROAS) Important?
ROAS is one of the most useful metrics when it comes to understanding the overall impact and efficiency of your paid media investments. Measuring ROAS can help you answer questions like:
- Is my advertising spend generating a profit or a loss for my business?
- Which of my ad campaigns, ad groups, or advertisements are driving the most profit?
- Which paid media platforms are driving the most profit for my business?
- How can I optimize my Google Ads Budget?
- How does the profitability of paid media compare to other customer acquisition strategies for my business?
- How should I allocate my advertising dollars to maximize revenue and generate the most profit?
B2B SaaS companies who achieve a high ROAS will rapidly accumulate the financial resources needed to efficiently scale their operations.
How to Calculate Your Return on Ad Spend (ROAS)
To calculate your ROAS for a given advertising campaign, platform, or time period, there are two basic pieces of information you’ll need:
- Total Value of Conversions – You’ll need to add up the total revenue generated from all sales during the specified time period.
- Total Ad Spending – You’ll also need to quantify your total dollars of advertising spend during the specified time period.
Once you’ve gathered this information, you can calculate your ROAS as:
Return on Ad Spend (ROAS) = Total Value of Conversions Total Ad Spending
A B2B SaaS company wants to calculate its ROAS for paid advertising on LinkedIn over the past 30 days. Data from the ad platform indicates that the company spent $5,200 on ads over the past 30 days. The company’s marketing attribution system shows that Linkedin advertising generated 8 new customers over the past 30 days, with total conversion revenues of $18,000.
The company can calculate its ROAS as:
Return on Ad Spend (ROAS) = $18,000$5,200
A ROAS of 3.46 indicates that the business is generating $3.46 for every dollar in Linkedin advertising spend.
A B2B SaaS marketing team wants to measure lifetime ROAS for a Google advertising campaign that has been running for the past three months. Data from the ad platform indicates a total of $12,300 in advertising spend since the inception of the campaign. The team’s marketing attribution system shows that the campaign has yielded just 8 conversions with a total revenue value of $10,000.
The company can calculate ROAS for this campaign as:
Return on Ad Spend (ROAS) = $10,000$12,300
A ROAS of 0.813 indicates that this campaign lost just under 19 cents for every dollar of advertising spend.
ROAS vs. CPA – What’s the Difference?
We’ve already mentioned the similarities and differences between ROAS and ROI, but what’s the difference between ROAS and Cost per Acquisition (CPA)?
CPA is a paid advertising metric that measures the average cost of conversions from a paid media campaign during a specified time period. CPA can be calculated as:
Cost Per Acquisition= Total Ad Spend Total Number of Conversions
When you measure ROAS, you’re comparing “dollars generated” with “dollars spent” and your result will be a unitless ratio of profitability.
When you measure CPA, you’re comparing “conversions generated” with “dollars spent” and your result will be the average cost of a conversion in dollars.
Measuring CPA is the most useful when your conversion goal is something other than immediately getting a sale. That’s because the CPA metric lets you define conversions however you choose, including things like getting the user to subscribe to a mailing list, register for a webinar, or book a product demo.
But while CPA lets you measure the cost of a conversion, you’ll still need to assign a value to each conversion action to determine if the pipeline you’re generating makes your campaign seem worthwhile.
Directive Goes Beyond ROAS to Unlock Marketing at Scale
To maximize the impact of our SaaS PPC marketing efforts, we look beyond ROAS and leverage the LTV:CAC metric, targeting a 3:1 ratio that leads to cost-efficient and sustainable business growth as you scale your marketing spend.