Many companies pay large sums of money annually in digital marketing advertising, through ads in Google Ads. However, it is important to determine the level of profitability of these campaigns, to know if they are worth continuing to pay for them. That is why this article will show what ROAS (Return on advertising investment) is and how to calculate it.
ROAS is not ROI
Both ROI (Return on investment) and ROAS (Return on advertising investment) are terminologies that many people get confused. A Persian that they are related to are not the same. Therefore, it is necessary to know how to differentiate them. Each of these terms will be defined below.
- ROI: is a measure that allows you to calculate the return on the investment that has been made. That is, measure the money that a company lost or won. Thus, to know if the actions carried out are profitable.
- The ROAS: is a tool provided by Google to measure the effectiveness of digital marketing advertisements. Taking into account the objectives that the company has proposed.
How ROAS is calculated
The formula used to calculate the ROAS is very easy and is applied during the time interval that the advertising campaign lasts.
This measure allows you to know the percentage that you earn for every dollar you invested in the digital marketing campaign . In this way, you can know if it is profitable or not. That is, if more money has been lost than invested.
A food distributor has started an ad campaign on Google Ads, investing $ 700 a month. During that time interval, she has been contacted by 7 clients, each spending $ 2,000 on the purchase of products.
In order to determine the ROAS for your ad campaign, you must convert your revenue. That is, 7 clients x $ 2,000 = $ 14,000. The $ 14,000 being the absolute profit. Then the formula is applied:
This is interpreted to mean that the distributor’s earnings were $ 20 for every dollar they invested. It is important to note that Google Ads has activated a column called Cost / Conv to display this information.
How ROAS profitability is calculated
The products that companies sell have a cost. For this reason, although the ROAS determines a positive amount, it is not the only factor to affirm that the digital marketing campaign is profitable.
Because if the cost of the products plus the cost of advertising is higher than the income, then it will not be profitable. That is why, to know if the results are favorable, the profit margin of the advertised product must be determined.
Also, it is essential to keep in mind that advertising costs vary according to the business sector and the conditions of the company.
Profitability point formula
The formula to calculate the profitability point is very easy, you just need to know the profit margin.
Finally, the ROAS allows you to know the profitability of an advertising campaign . However, other factors such as customer recommendations, recurring sales, and brand visibility need to be taken into account.