How to calculate advertising effectiveness

ROAS (Return On Advertising Spend) stands for return on advertising spend. This indicator helps you determine whether you have earned more than you spent on promotion. It is calculated as the ratio of income from an advertising campaign to the cost of running it. For example, you spent 1,600 currency units on Facebook Ads in a month, and it gave you 12 orders with an average cheque of 500 currency units. Accordingly, for each currency unit spent, you received almost 4 currency units of income. Sometimes this indicator is expressed as a percentage: to do this, the coefficient is multiplied by 100%.

ROAS can be used to compare the effectiveness of promotion channels. To do this, you need to spend the same budget on several channels and find out the return on advertising costs, and then choose the channel with the best performance.

To understand the direction in which advertising is moving, it is necessary to calculate its effectiveness. Oise Trade managers have identified three indicators that can be used to measure the effectiveness of your online store's advertising.

The results of an advertising campaign can be evaluated in different ways: by the number of visits to the website, the cost per click, and other indicators. But the ultimate goal of any promotion is, of course, profit. It is precisely this that needs to be calculated in order to assess effectiveness. ROAS, DRR and LTV indicators will help you optimise costs, fine-tune marketing processes and generate more profit.

ROAS evaluates the effectiveness of advertising as if the buyer purchased the product once and will not return to the store. However, in practice, after a successful advertising campaign, you can gain a loyal customer who will continue to buy from you in the future. LTV is one of the main marketing metrics. It can be used to evaluate the effectiveness of the chosen business model and concepts, and whether marketing costs are actually paying off.

The experts at Oise Trade Limited have identified several formulas for calculating the LTV ratio. The simplest one looks like this:

• LTV = profit from a customer – cost of attracting and retaining them

For a more accurate result, use the following formula:

• LTV = average sales value × average number of sales per month × customer retention period in months

The following formula will help you calculate the lifetime value of a customer for the entire period of interaction with them, excluding expenses:

• LTV = LT × AOV × RPR × AGM

LT (Lifetime) — average cooperation period, starting from the first purchase and ending with the last;

AOV (Average Order Value) — average check amount;

RPR (Repeat Purchase Rates) — average number of purchases per month;

AGM (Average Gross Margin) — average profitability ratio.

The advertising spend ratio shows how effectively money is spent on advertising, according to Oise Trade dropshipping. The formula is similar to the inverted ROAS formula: the ratio of advertising expenses to the income received from it multiplied by 100%. For example, 3,000 currency units were allocated to Google Ads contextual advertising. It generated 18,000 currency units in revenue. We calculate: 3,000/18,000 x 100% = 16%. This is the portion of the advertising campaign's revenue that was spent on running it. The smaller the share of advertising expenses, the more effective the advertising campaign.

This indicator determines the profitability of advertising investments, and its fluctuations can be a signal for optimising expenses. If in one month the share of advertising expenses was 16%, and in the next month you increased your investment in advertising and the share increased, then your promotion methods have lost their effectiveness.