How to Calculate Your True Return on Ad Spend (ROAS)

Think about the ads you run and the money they cost. What happens when you don’t know which ads are effective and which aren’t?

Of course, you can measure the effectiveness of an ad by metrics like the number of views, click-through rate, and conversion rate. But some ads with low conversion rates generate more income because of the value of each purchase, and some with high click-through rates make less money because of low conversion rates.

Metrics like CTR and conversion rate are insufficient because they don’t reveal precisely how much revenue you generate when you run an ad. That is for the return on ad spend (ROAS) metric.

Stick around to find out what return on ad spend means and how to calculate return on ad spend on social media.

What Is Return on Ad Spend (ROAS)?

Return on ad spend is the revenue you generate per dollar spent on an ad campaign. ROAS formula is the revenue generated from an ad divided by the amount spent running the ad.

Imagine you spend $250 running a Facebook ad, and the ad generates an income of $3,000. Your ROAS is 3000 divided by 250, which equals 12. Since it is measured as a ratio, your ROAS is 12:1, meaning you made $12 for every $1 spent. However, true ROAS is in relation to all the costs associated to obtain that purchase. In other words, consider your margins.

ROAS vs. ROI

ROAS is specific to the CPM and revenue generated from a particular ad. Calculating the returns on different ads reveals the ads generating the most income.

On the other hand, extra expenses are included when calculating ROI. For instance, the ROI will factor in the costs of running an ad, hiring a graphic designer, hiring a copywriter, and setting up a landing page.

Reasons for Difficulty Getting Accurate Data With ROAS

Here are common reasons why marketers have difficulty getting accurate ROAS data on social media:

The attribution window (window of time to view an ad journey): Setting a longer attribution window on ads allows you to increase the accuracy of Facebook reports. However, the longer the attribution window, the longer you wait to get those reports. Plus, if customers convert outside the window limit, the conversion is not attributed to the correct ad. This is why AdBeacon’s lookback window is so powerful! If a product historically has a longer lead time, tracking the customer journey is essential to effective decision making.

Delays in conversion times may affect your ROAS: Delays in conversion times occur when customers don’t make a purchase soon after they click on an ad. If your attribution model is not last-click, the platform has to calculate the conversion credits backward in time to map the buyer’s journey. As a result, the ROAS reports you get from Facebook or Google are not always up to date.

What Occurs When My Data Is Inaccurate?

When your data is inaccurate, you don’t get the real picture of how ads perform. You typically get overreported and underreported performances that affect the target CPM.

Overreported performances are typical when you use last-click and first-click attribution models. They don’t give you the complete picture of a customer’s journey. You get inaccurate data on how ads drive conversion and revenue.

What Is a Good ROAS?

It depends. We think that an ROAS of at least 4:1 indicates profit. Some businesses need a high ROAS to break even. Some are okay with a 2:1 target return.

To objectively decide whether an ROAS is good enough, consider the following factors:

Objective of running the ad
Platform
Industry

If your main goal is to increase brand awareness, a low ROAS is okay because revenue generation is not your target.

The average ROAS differs per platform. You should try to keep up with the average ROAS of your industry. Any ROAS below the industry average is not a good sign.

What Goes Into Calculating ROAS?

To accurately calculate return on ad spend, you must factor in core metrics like:

Number of purchases
Value per purchase

Facebook calculates these metrics inaccurately many times for several reasons. When customers convert outside the attribution window, conversion credit is assigned to the wrong ad. This leads to underreporting or overreporting.

Even though you can try to increase Facebook ad reporting accuracy by enabling metrics like app engagement, offline conversions, and cross-platform conversions, errors still occur because the calculations are not in real time.

How Can I Best Evaluate My Approach to Running Ads and Increase My ROAS?

AdBeacon uses first-party data to provide accurate ROAS data in real time. From your dashboard, you can see ad performances down to the individual ads, make changes, and boost your ROAS.

First-party data is better than third-party data because it is directly collected from your customers instead of using third-party apps that may be inaccurate. AdBeacon goes beyond average because it connects all collected data to map a customer’s journey.

AdBeacon collects accurate data because they are generated and reported in real time. You never have to wait for the attribution window to be over to see how your ads are performing.