Calculating Your Return on Ad SpendBy Emma
Emma

Advice14.01.25
2 min read

Learn how to calculate target Return on Ad Spend (ROAS) so that you can stay profitable with your advertising.

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Calculating Your Return on Ad Spend

When it comes to running paid ads, everyone wants to make sure they’re getting a solid return on their investment (ROI). That’s where ROAS (Return on Ad Spend) comes in. It allows you to work out what’s driving profitable revenue so you know where to focus your efforts.

First, What is ROAS?

ROAS is a simple ratio that measures how much revenue you earn for every pound spent on advertising. It’s calculated like this:

ROAS = Revenue from Ads / Cost of Ads

For example, if you spend £1,000 on ads and make £5,000 in sales, your ROAS is 5:1 (or simply 5). This means that for every £1 you spend, you earn £5 back.

Why setting ROAS targets is important

ROAS targets help you:

  • Budget smartly: It keeps your ad spend in check and ensures you’re investing in campaigns that actually deliver.
  • Optimise performance: With clear targets, you’ll know when to tweak, scale, or hit pause on your campaigns.

The formula to calculate ROAS targets

ROAS Target = (Product Price – Costs) / Ad Spend

For instance, let’s say:

  • Your selling price is £50.
  • Your product costs £20 to make.
  • You’re spending £10 per sale on ads.

Your ROAS target would be:

(£50 - £20) / £10 = 3

In this case, your target is 3:1, meaning you need to earn £3 for every £1 spent on ads to hit your profit goals.

Tips for ROAS success

  • Start small and scale: Test your campaigns with a lower budget before going all-in.
  • Track and tweak: Regularly monitor your campaigns and adjust as needed.
  • Don’t forget Lifetime Value (LTV): If your customers are likely to buy from you again, factor that into your calculations. Higher LTV can justify a lower initial ROAS.

Calculating ROAS targets doesn’t have to be rocket science. By understanding your costs, defining your profit margin, and setting realistic goals, you’ll have a clear roadmap for ad success. And remember, marketing is all about testing and learning so don’t stress if you don’t nail it right away.

If you need help weighing up the costs and benefits of your social ads then get in touch.

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