ROAS is a vital metric for tech and SaaS companies to evaluate advertising efficiency. By optimizing ROAS, CMOs can enhance their marketing strategies, ensuring that ad spend directly contributes to revenue growth.
What is ROAS?
Definition of ROAS
ROAS, or Return on Ad Spend, measures the revenue generated for each dollar spent on advertising. This metric is pivotal in evaluating the performance of your ad campaigns, providing clear insights into how effectively your advertising budget is driving revenue.
ROAS in the Marketing Ecosystem
ROAS fits into the broader marketing ecosystem by focusing on the immediate revenue impact of your advertising efforts. Unlike ROI (Return on Investment), which encompasses overall financial returns including operational costs, ROAS zeroes in on the direct revenue yield from ad spend.
Understanding ROAS helps CMOs track how well ad spend translates into revenue, enabling more precise budget allocation and strategy refinement.
ROAS vs. ROI
While ROAS highlights the revenue return per advertising dollar, ROI provides a comprehensive view of overall profitability, taking into account total investments and operational costs. For B2B CMOs, ROAS offers actionable insights for optimizing ad spend, while ROI gives a broader picture of long-term financial performance.
Calculating ROAS
Step-by-Step Guide
- Identify Revenue from Ads: Determine the total revenue generated from your advertising campaigns. This is the direct income attributed to your ads.
- Determine Cost of Ads: Calculate the total expenditure on the ad campaigns. This includes all costs related to running and managing the ads.
- Apply the Formula: Use the formula ROAS = Revenue from Ads / Cost of Ads to compute your ROAS.
Example Calculation
For a B2B SaaS company, suppose you invested $15,000 in an ad campaign and generated $60,000 in revenue.
Your ROAS would be:
This means your ad spend yielded a fourfold return, indicating a strong performance.
In a tech scenario, if a campaign cost $8,000 and produced $32,000 in revenue, your ROAS would be:
Similarly, a fourfold return signifies effective ad spend.
What is a Good ROAS?
Determining what constitutes a good ROAS depends on your industry benchmarks and business objectives. For B2B tech and SaaS companies, a target ROAS of 3:1 or higher is often considered good.
A general rule of thumb is this:
ROAS = <1
You need to rethink your approach (unless the goal isn’t revenue), you’re losing money on every marketing dollar spent. So pause that activity until you can take something to market in the green.
ROAS = 1
Meaning: Break-even point. You are generating revenue equal to the amount spent on ads. This suggests that while you are covering your ad costs, there is no profit.
ROAS > 1 and ≤ 3
Meaning: Low to moderate return. You are generating more revenue than you spend on ads, but the return may not be sufficient to cover other business expenses or generate substantial profit. This may be acceptable in highly competitive markets or for early-stage campaigns.
ROAS > 3 and ≤ 5 (start scaling spend here)
Meaning: Good return. Your ad spend is producing a healthy return, and you are likely covering your costs and generating a profit. This is generally considered a strong performance and indicates efficient ad spending.
ROAS > 5 and ≤ 10
Meaning: High return. Your ads are performing exceptionally well, generating significant revenue relative to the ad spend. This suggests a very effective advertising strategy with a solid profit margin.
Keep in mind, ideal ROAS can vary based on market conditions, competition, and campaign goals.
Target ROAS
Setting a target ROAS involves analyzing your business goals, market conditions, and past performance. A target ROAS helps guide budget allocations and campaign strategies. For instance, if your goal is to scale efficiently while maintaining profitability, you might set a higher target ROAS to ensure each ad dollar delivers significant returns.
Understanding and calculating ROAS is crucial for B2B CMOs looking to optimize their marketing strategies. By focusing on what constitutes a good ROAS and applying precise calculations, you can drive more effective advertising investments and achieve sustainable growth.
Additional Resources
For a deeper dive into ROAS and how it can refine your marketing strategies, explore our media planning and activation resources and read about how we helped Virtual College increase ROAS by 42% YoY.
