Understanding & optimizing ROAS
How do I know if my advertising campaign is really profitable and efficient? Is the invested marketing budget paying off in terms of sales? And can I measure this? The Return on Advertising Spend (ROAS) provides you with important indicators to answer your questions. This key performance indicator helps you to calculate exactly how much turnover you achieve per advertising euro invested – and therefore to make data- driven decisions about where your budget is best spent. As part of our blog post series “The ultimate guide to marketing KPIs”, we are therefore dedicating today to this relevant topic for marketing decision-makers.
The ROAS helps you to use your advertising budget efficiently.
What is the ROAS and why is it so important?
ROAS measures how efficiently advertising expenditure is converted into sales, i.e. how much sales you generate per dollar invested in advertising. For example, a ROAS of 5 means that every dollar spent generates five dollars in sales. This key figure therefore helps you to use marketing budgets in a targeted manner and to better objectively evaluate the performance of individual campaigns, channels or target groups.
ROAS vs. ROI – what’s the difference?
While ROAS measures direct advertising efficiency, return on investment (ROI) also looks at other costs, such as staff, logistics or product development. A high ROAS does not automatically mean profitability if the total costs outweigh the revenue.
👉 In the short term, ROAS helps to optimize campaigns.
👉 In the long term, ROI provides a strategic perspective on profitability.
How do I calculate the ROAS?
The calculation of the ROAS is a pivotal step in ensuring that your advertising activities are more efficient. Although the ROAS formula is very simple, it is not only about putting costs and sales in relation to each other, but also about deriving strategic decisions: Which campaigns are profitable? Where should the budget be reallocated? When is it necessary to optimize?
The following formula is used to calculate ROAS:
Example:
A fashion retailer invests 10,000 euros in an Instagram campaign. It generates 75,000 euros in sales. The ROAS is therefore 7.5 – a clear sign of a successful campaign.
👉 ROAS < 1: campaign costs more than it brings in → revision necessary
👉 ROAS > 3 – 5: Good value in e-commerce, but of course margins, shipping costs etc. must also be taken into account
You can also calculate the break-even ROAS (BEROAS). This is the minimum value at which a campaign becomes profitable. If you would like to find out more about this topic, please contact us.
What are the challenges of the ROAS analysis?
Despite its high informative value, there are a number of hurdles that companies may encounter when analyzing ROAS. Many of these challenges have already been solved for our customers in the past. Here are a few examples with possible solutions.
Challenge: Advertising revenue must be correctly allocated – but gaps in the existing data, e.g. due to incomplete tracking of offline campaigns, incorrect use of UTM parameters or multi-touchpoint journeys by customers, make this difficult.
✅ Solution:
- Use of GA4, Adobe Analytics with standardized UTM parameters for exact campaign allocation
- Setup of a marketing data stack to consolidate and evaluate data centrally
- Tracking of offline campaigns via QR codes or coupon codes
Challenge: The ROAS often only shows direct sales, but ignores repeat sales or brand awareness.
✅ Solution:
- Supplement the analysis with additional metrics such as customer lifetime value (CLV)
- Segmentation of customer data according to purchasing behavior for additional information
- Use of customer data platforms (CDPs) for better data analysis
Challenge: On the budget level, in addition to pure advertising expenditure, personnel costs, agency fees etc. can also influence the profitability of your campaigns – if you decide to include them in your calculation.
✅ Solution:
- Define transparent rules for cost allocation that are applied consitently to create comparability
- Conduct two different calculations: ROAS with and without internal costs
Challenge: Seasonality, simultaneous competitor campaigns, inflation or other factors can influence the results of your ROAS analysis.
✅ Solution:
- Use industry benchmarks
- Include seasonal analyses and long-term trends in your analysis
Challenge: Branding campaigns are often aimed at raising awareness and do not usually lead to an immediate increase in sales.
✅ Solution:
- Include other key figures such as cost per mille (CPM), reach or increase in brand awareness in your analysis
- Use surveys from market research (aided and unaided awareness), SEO analyses etc. as supplementary measurement methods
Thanks to modern analysis techniques, companies can measure and optimize their ROAS even more precisely. Here are two examples:
LSTM models (Long Short-Term Memory)
- Recognize seasonal patterns and long-term developments in advertising data
- Improve the predictive capability for future campaigns
Task Decomposition-Based Approach
- Decomposes the factors influencing ROAS into sub-factors (channels, target groups, campaign types), models these individually and then combines the results
- Helps Marketing Managers to discover hidden dependencies between the variables and thus make better forecasts
How can I optimize my ROAS?
It is worth looking at ROAS not only in isolation, but also for benchmarks within your own campaigns and across markets (if data is available). One example is a comparison of the ROAS across your various marketing channels, which can provide very useful insights:
Image: Example ROAS comparison matrix across different channels
The following tips have also proven successful in our ROAS consulting:
Optimize your target group definition
Use data analysis tools such as GA4 or Facebook Insights to define your target groups even more precisely. The better you understand your potential customers, the better you can target your campaigns and minimize the scatter loss.
Test different ad variants
Carry out A/B tests for different ad texts, images and call-to-actions. This will help you find out which content performs best and increases your conversion rate.
Scale successful campaigns
Identify advertising measures with a high ROAS and increase their budget in a targeted manner. At the same time, campaigns with low efficiency should be optimized or paused. Both apply under the premise that external factors are not exclusively responsible for the particularly high or low ROAS.
Use automation and real-time tracking
Rely on data-driven (and possibly AI-supported) bid strategies and dynamic budget adjustments in Google Ads and Meta, for example, to continuously improve your campaigns. Real-time data helps you to react faster to market changes.
Increase sales through cross-selling and up-selling
Increase your average order value (AOV) by specifically promoting bundles or complementary products. Recommendation algorithms and suitable offers can help to maximize sales per customer.
Conclusion: ROAS as an important factor in the marketing metrics mix
Let’s summarize: The ROAS is an essential key figure for evaluating the efficiency of your advertising campaigns more precisely. In combination with other modern analysis methods, it enables targeted control of your marketing budget and sustainable optimization of your marketing strategy.
If you would like to find out more about the topic of “ROAS measurement”, you are welcome to read our more detailed guest article on the subject in the “Inbound Marketing Days Magazine”.
And if you are looking for ROAS consulting or data analytics consulting in Munich, throughout Germany or worldwide, please get in touch with us. We have been measuring success for globally well-known corporations and SMEs for almost 20 years and are looking forward to talking to you.