If you have ever looked at an ad report, you have probably seen the term ROAS. It sounds technical, but the idea is simple, and understanding it can save you a lot of money. Here is what it means, how to calculate it, and how to know whether yours is good.
What ROAS means
ROAS stands for return on ad spend. It measures how much revenue your ads bring in for every dollar you spend on them.
ROAS = revenue from ads / ad spend
If you spend $1,000 on ads and they bring in $4,000 in revenue, your ROAS is 4. Some people write it as 4x or as 400 percent. Either way it means $4 of revenue for each $1 of ad spend.
A simple example
A plumbing company spends $2,000 in a month on ads. Customers who came from those ads paid a total of $9,000. The ROAS is 9,000 / 2,000 = 4.5.
An online store spends $5,000 and its ads bring in $12,500 in sales. The ROAS is 2.5.
(These are example numbers.)
ROAS is not the same as profit
ROAS counts revenue, not profit. A business with thin margins might need a high ROAS to make any money, while one with high margins can do well with a lower one. That is why there is no single "good ROAS" number that applies to everyone.
So what is a good ROAS?
A good ROAS is one that is comfortably above your break-even point. Break-even ROAS depends on your profit margin:
Break-even ROAS = 1 / profit margin
- At a 50 percent margin, break-even is 2.0
- At a 40 percent margin, break-even is 2.5
- At a 25 percent margin, break-even is 4.0
If your ROAS is above break-even, your ads are paying for themselves and leaving a profit on the sale. If it is below, you lose money on those sales before counting other costs.
You will often see generic claims about "good" ROAS, such as 4 or 5. Be careful with them. Whether 4 is great or terrible depends entirely on your margins.
How to find your numbers
Revenue from ads. Use the revenue your ad platform reports, but compare it to your own sales records. Platforms can over- or under-count.
Ad spend. What you paid the ad platforms. For a fuller picture, also consider management fees and creative costs.
Profit margin. What is left of each sale after the cost of the product or service, before ad spend.
For service businesses with leads, you may need to estimate revenue: leads multiplied by the share that become customers multiplied by what a customer is worth. Our free ROAS Calculator has a lead generation mode that does this, and an e-commerce mode for stores.
What ROAS does not tell you
- Lifetime value. A customer who buys again is worth more than the first sale.
- Profit after all costs. Overhead and other expenses are not in ROAS.
- Quality of leads. A high ROAS based on poorly tracked data can mislead.
- Contribution of other channels. Ads may assist sales that other channels get credit for.
That is why many businesses also look at metrics like MER, cost per customer, and customer lifetime value.
How to improve ROAS
- Increase conversion with better landing pages, product pages, and offers
- Improve targeting and creative
- Cut waste, such as irrelevant keywords and audiences
- Raise average order value or customer value
- Follow up on leads faster, since close rate affects revenue per lead
- Make sure someone answers the phone. Our free Missed Call Revenue Calculator shows what missed calls cost
Frequently asked questions
Not always. A very high ROAS can mean you are spending too little to grow. The goal is profit and growth, not just a high ratio.
ROAS compares revenue to ad spend. ROI compares profit to total cost. ROAS is simpler but less complete.
Use it as a guide, and compare with your actual sales and tracking.
What to do next
Check yours in a minute with the free ROAS Calculator. If you would like help improving your numbers, book a free strategy call.
