When running paid ads, Return on Ad Spend (ROAS) is a key metric that helps marketers understand how much revenue is generated for every dollar spent on advertising. While ROAS is valuable for tracking campaign performance, it doesn’t always paint the full picture. Enter True ROAS—a deeper, more accurate way of measuring ad effectiveness by accounting for the full customer journey and additional factors beyond immediate revenue.
What is ROAS?
ROAS is calculated using a simple formula:
ROAS=Revenue from adsAd spend\text{ROAS} = \frac{\text{Revenue from ads}}{\text{Ad spend}}ROAS=Ad spendRevenue from ads
For example, if you spend $1,000 on ads and generate $4,000 in revenue, your ROAS is 4:1, meaning for every dollar spent, you made four dollars in return. However, this basic metric doesn’t take into account costs like customer lifetime value (CLV), repeat purchases, or associated business expenses (fulfillment, overhead, etc.).
What is True ROAS?
True ROAS goes a step further by factoring in the entire customer journey, including long-term value and repeat purchases. It considers not only the initial sale driven by an ad but also the value generated by that customer over time. True ROAS also adjusts for costs such as product returns, discounts, and fulfillment expenses, offering a more accurate view of ad profitability.
The formula for calculating True ROAS is:
True ROAS=Customer Lifetime Value−Returns/Refunds/DiscountsAd Spend + Other Costs (Creative, Fulfillment, etc.)\text{True ROAS} = \frac{\text{Customer Lifetime Value} – \text{Returns/Refunds/Discounts}}{\text{Ad Spend + Other Costs (Creative, Fulfillment, etc.)}}True ROAS=Ad Spend + Other Costs (Creative, Fulfillment, etc.)Customer Lifetime Value−Returns/Refunds/Discounts
This gives you a more comprehensive understanding of your ad’s effectiveness, reflecting both immediate revenue and long-term customer value.
Why Does True ROAS Matter?
While a high ROAS might seem like your ads are performing well, it can be misleading if you’re not considering the full picture. True ROAS gives you a more holistic view by:
- Incorporating Customer Lifetime Value: Helps you evaluate the long-term value of acquiring customers through ads.
- Adjusting for Discounts and Returns: Accounts for net profits after returns, refunds, and other deductions.
- Evaluating Retargeting Efficiency: Provides insights into how well your campaigns nurture leads into loyal customers.
- Assessing Full Costs: True ROAS considers the hidden costs like creative development, ad management fees, and fulfillment costs.
In combination with MER, you can get a comprehensive view of both the immediate and long-term profitability of your entire marketing strategy.
Conclusion
Both ROAS and True ROAS are important metrics, but True ROAS provides a clearer picture of how your ad spend impacts overall profitability. While ROAS is useful for short-term performance tracking, True ROAS offers insight into long-term business health by considering the entire customer journey and ongoing value. Additionally, monitoring MER helps ensure that all marketing efforts—not just ads—are contributing to your sales efficiently.
For sustainable growth, focus on maximizing your True ROAS and MER to ensure that your marketing efforts are contributing to long-term profitability, not just short-term wins.
Bonus KPI: Media Efficiency Ratio (MER)
In addition to True ROAS, another important KPI to consider is the Media Efficiency Ratio (MER). MER provides a broader view of your overall marketing efforts by evaluating total website sales in relation to all marketing costs, not just ad spend. This metric helps you understand how efficient your entire marketing strategy is in driving sales.
The formula for calculating MER is:
MER=Total Website SalesTotal Marketing Cost (Ad Spend + Creative Cost + Ad Manager Fees)\text{MER} = \frac{\text{Total Website Sales}}{\text{Total Marketing Cost (Ad Spend + Creative Cost + Ad Manager Fees)}}MER=Total Marketing Cost (Ad Spend + Creative Cost + Ad Manager Fees)Total Website Sales
For instance, if your total website sales are $100,000 and your total marketing costs (including ad spend, creative costs, and management fees) amount to $20,000, your MER would be:
MER=100,00020,000=5:1\text{MER} = \frac{100,000}{20,000} = 5:1MER=20,000100,000=5:1
This means for every dollar spent on marketing, you’re generating five dollars in website sales.
