“Are our ads profitable?” is often a tough question to answer. A number of formulas determine how much money we make after accounting for marketing expenses.
In this article, we will show you how to calculate the return on investment (ROI), return on advertising spend (ROAS), and the break-even ROAS.
Formula #1. Return on Investment (ROI)
First of all, ROI and ROAS aren’t the same and you need to keep that in mind. The main difference between the two indexes is that ROAS doesn’t take into account the cost of a product or service. On the contrary, ROI considers such costs and gives you a full overview of how profitable you exactly are.
ROI is a financial instrument that shows how profitable your business is considering the investment. In other words, ROI is a measure of profit on your investment.
When talking about paid ads, ROI measures the profit you’ll receive in relation to the total amount spent on advertising.
The index is more business-oriented than ROAS, and answers the question “Are we profitable with respect to all the costs incurred?”
Here’s the formula for ROI:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment *100%
Consider a simple calculation example. Let’s assume that you invested $18,000 in advertising activities and earned $64000 from it. Thus, your ROI will be:
ROI = ($64000 – $18000) / $18000 *100% = 255%
You need to evaluate the result after the calculation. Often business owners fail to answer: What is a good ROI?
It depends on your industry; for marketing an ROI <100% isn’t good, but an ROI>100% means that your investment is yielding results.
Formula #2. Return on Advertising Spend
The meaning of ROAS can be summed up with a question “Did we receive more money than we spent on advertising?”
The index is less business-oriented and aims to show the effectiveness of your advertising campaign.
To calculate the ROAS, you only need to know two things: your total advertising revenue and the total advertising cost.
Here is the formula for ROAS:
ROAS = Advertising Revenue / Advertising Costs * 100%
For example, if you spend $3,500 on Facebook Ads and earn $8,500, your ROAS will be:
ROAS = 8500 / 3500 * 100% = 242.8%
In this case, the ROAS of 242.8% is a good result. It means that every $1 spent resulted in a $2.43 return.
Formula #3. Break-Even ROAS
The ROAS doesn’t always show how cost-effective you are. No business can afford to give out its products or services for free.
So the ROAS calculation often isn’t enough to assess if you earned any money. For example, a business can have a huge ROAS, but the real calculations will show that advertising campaigns didn’t pay off.
That’s why you need to calculate the break-even ROAS. To do so, you need to know your profit margin.
For example, an advertiser sells cars for $25,000. Out of that amount, the price of the car is $20,000, the remaining – $5,000 – is your profit margin.
Simple calculations show that the profit margin is 20%. Now we can calculate the break-even ROAS:
Break-Even ROAS = 1 / Profit Margin * 100%
Break-even ROAS = 1 / 20% = 500%
In other words, a company has to receive $5 for each $1 spent on ads to remain profitable. Or else, the company will lose money.
Keep in mind that such calculations do not take other business expenses into account such as rent or taxes.
The formulas discussed in the article will help you calculate your profits and assess if your advertising investments are bearing fruit.
It is crucial to understand what an advertising campaign gives you in return. Only businesses that evaluate results and draw the right conclusions stay on top and remain profitable.