ROAS (return on ad spend)

The formula

• ROAS = R / K

R is the revenue the campaign brought in and K the money spent on the ads. A ROAS of 4 means 4 in revenue for every 1 spent. It is sometimes written as a percentage (400%) or as a ratio (4:1); the number is the same.

A worked example

A campaign costs 5,000 and the sales it is credited with come to 20,000: ROAS = 20,000 / 5,000 = 4. Turned round, a target ROAS of 4 on a budget of 8,000 asks for 32,000 in revenue, and 20,000 of revenue at a ROAS of 4 means 5,000 was spent.

ROAS is revenue, not profit

A ROAS of 4 does not mean the campaign earned four times its cost. The revenue has to pay for the goods first. With a profit margin of 25% before advertising, 20,000 in revenue carries 5,000 of margin, and the campaign that cost 5,000 broke even. The break-even ROAS is 1 divided by the margin: at 25% it is 4, at 40% it is 2.5. A campaign is profitable when its ROAS is above that figure, and the figure is different for every product.

ROAS or ROI

Return on investment takes the profit after the cost and divides by the cost. The campaign above, at a 25% margin, has a ROAS of 4 and an ROI of (5,000 − 5,000) / 5,000 = 0. ROAS is the ad manager’s figure, quick to read from the platform; ROI is the owner’s.

Common mistakes

• Reading 4 as a 300% profit. ROAS says nothing about margin.
• Trusting the platform’s R. Revenue is credited by attribution rules, and two platforms can both claim the same sale.
• Leaving out costs that belong in K. An agency fee or the cost of making the ad raises K and lowers the ROAS.

Frequently asked questions