How to calculate your return on ad spend (ROAS) and return on investment (ROI) for your restaurant advertising budget
Developing a solid restaurant marketing strategy that includes paid advertising can bring in new customers and boost the loyalty of existing guests.
But how do you choose between local news and print advertising, Google ads vs. Facebook and Instagram, or Grubhub Smart Promotions and Loyalty tools? And once you launch a campaign, how do you know if your paid advertising strategy is working?
From learning how to calculate ROAS to gaining a better understanding of how your restaurant advertising campaigns’ creative and financial aspects connect, this quick guide will help you protect your budget while highlighting your brand.
What is return on ad spend (ROAS)?
ROAS stands for “return on ad spend.” This metric measures how much revenue an ad campaign generates compared to spending on the ad. This is usually done using ratios. For instance, if you make $5 for every $1 you spend on ads, your ROAS is 5:1.
ROAS can be attached to a single promotion, too, versus an entire campaign. For instance, say you decide to run a first-visit promo on Grubhub to reward new customers with a coupon they can apply to their first order from your restaurant. Because those customers order more than the coupon is worth, you end up making $12 for every $2 spent on the promotion. That makes your ROAS 12:2 — not bad!
ROAS is an invaluable tool because it quantifies the effectiveness of your campaign. Rather than guessing whether your ads are hitting home, you can attach an actual number to your analysis.
What is a good return on ad spend (ROAS) for restaurants?
While it might seem like any ROAS ratio bigger than 1:1, the apparent break-even point would be positive, but that’s not the case. While making back what you spent on an ad campaign looks like a wash doesn’t account for your cost of goods sold, labor, and other expenses.
Ideal ROAS depends on various factors, including your industry, operational expenses, and profit margins. Most companies strive for a 4:1 ratio — meaning they spend $1 on ads and bring in $4 in revenue — but the average actual ROAS is closer to 2:1.
How to calculate ROAS for your restaurant’s advertising and promotional campaigns
Before analyzing your ad spend, you need to learn how to calculate ROAS for each campaign or promotion. Then, simply divide your revenue by the cost of advertising, with the numbers explicitly used for the ad or campaign at hand.
ROAS = revenue/advertising cost
You can choose to calculate your ROAS for your total ad spend for:
- A specific time period, such as all promotions or loyalty programs you ran during a particular quarter or the pre-holiday season)
- By channel, such as paid social media, paid Google, local newspapers, and even Yelp paid promotions or Grubhub Smat Promotions and Loyalty Tools
What is the difference between ROAS and ROI?
Speaking of ROI, what’s the difference between the return on investment on the return on ad spend?
These two terms are often conflated and sometimes even used interchangeably, but there are some differences. Think of ROAS as calculating the return on a specific ad campaign. You’re measuring revenue, not necessarily profitability.
ROI, on the other hand, measures the total return of your overall investment. This is the “bigger picture” metric. ROI is what you need if you want to see if your marketing campaign is making your business money.
Both metrics are important. You may use both simultaneously or look at them separately depending on your goals and what information takes priority at any given time.
How to calculate ROI for your restaurant marketing campaigns
As you’re busy generating new sales, promoting that upcoming wine dinner, getting guests excited about the fall menu, or shining a spotlight on that nifty 2-for-1 appetizer deal, you’re also spending money. Calculating your marketing ROI, or return on investment, is how you’ll determine not only whether a campaign is effective but also whether it makes sense once you take into account all your other revenue and expenses.
Remember, ROI is a big-picture tool. You can use the resulting number to justify your marketing budget to higher-ups and choose which marketing tactics to use in the future (and which to ditch).
To calculate your restaurant marketing ROI, use this formula:
(sales growth – marketing cost)/marketing cost = ROI
Multiply that resulting ROI by 100, and you’ll get your marketing ROI percentage.
So, say you spent $2,000 on marketing and experienced a sales growth of $8,000. The calculation would go as follows:
($8,000 – $2,000)/$2,000 = 3
3 x 100 = 300%
The marketing campaign had an ROI of 3 or 300%, meaning every dollar spent generated $3 in profit. Is that ideal? Well, it depends. There is no concrete benchmark for what constitutes an ideal ROI — the same goes for ROAS, for that matter. Even the experts disagree. Some say restaurants should aim for the profitability of at least 15%. Others say the number should be closer to 15-25%.
Restaurants that leverage Grubhub Smart Promotions also get access to ROI data to help understand the full return on investment for each promotion run on our platform. Learn more here.
As with ROAS, your ideal ROI depends on the type of restaurant you have, but it also depends on how new your restaurant is. Brand-new restaurants typically have higher operational costs due to how expensive it is to launch an eatery.
That’s why many restaurants don’t turn a profit for several years. Overall, single-location full-serve restaurants in the United States have an average profit margin of just 6.2%. Figure out how to maximize the efficacy of your marketing campaigns, and you might well beat that number.
Reach new customers and build loyalty with Grubhub Smart Promotions & Loyalty tools
Marketing campaigns can’t exist in a vacuum. Spontaneous acts of marketing — those moments when you throw cash at a Facebook ad campaign or decide to boost an Instagram post to “see what happens” — may feel exhilarating at first. But the long-term result is that you’re spending money without having any idea whether that financial output is worth it.
That’s why it’s important to leverage powerful promotional tools, like Grubhub’s Smart Promotions, that provide you the tools to reach new customers and the analytics to know your campaign is working.
Ready to increase your profitability? Restaurants that sign up for Grubhub’s premium package get access to our powerful promotional and loyalty tools that can help you grow your business and differentiate your restaurant from others on Grubhub Marketplace.