A long-standing measure of campaign performance has been Return on Ad Spend (ROAS). The standard formula for this is:
This formula doesn’t however take your actual costs to purchase and deliver that sale into account. Additionally the indicator can be significantly misleading with a 100% ROAS sounding impressive when really it means that your campaign has generated just enough revenue to match the cost of the campaign.
Even worse if your average gross margin on your products or services is 50% then you need at least 200% ROAS. I.e. for every $100 sale it costs you $50 to purchase and deliver that sale. If your campaign costs you $50 to make that sale you need a minimum of $100 in revenue from that campaign not including your other fixed costs such as overheads, salaries, etc.
The result is that in most cases the ROAS measure needs to be very high for profit to be made. Agencies love big numbers and quoting a figure such as 2,000% ROAS sounds great but if you are selling at a low margin you probably need this just to break even.
Calculate your gross margin percentage and profit per campaign. These are the figures that you really need to make an informed decision as to the effectiveness of each of your campaigns.
Ideally you will calculate the profit per campaign but this isn’t always possible. In cases where this isn’t possible then the more general approach to calculate your Gross Margin Percentage is appropriate. You can use this figure in conjunction with your Return on Ad Spend and other measures to identify whether a campaign is likely to be profitable.
Where you have the data available then you should use the actual profit per campaign method.
There are two ways that you can do this, the easy way is to use our easy to use campaign profit calculator. For the more mathematically inclined the following is the process to do this manually.
These are outlined in these two articles.
Both of these articles allocate 100% of the sale to the last campaign attribution method. It is possible to use these methods, where multiple campaign attribution allocations are required, by allocating percentages of the profit to each of the campaigns in the attribution model. In this area we encourage you to contact us to discuss your requirements.
One way or another it is critical that you use profit rather than revenue to assess your campaign performance.