Return on Ad Spend (ROAS)

What is ROAS? Calculating Return On Ad Spend

Definition: Return On Advertising Spend, (ROAS), is a marketing metric that measures the efficacy of a digital advertising campaign. ROAS helps online businesses evaluate which methods are working and how they can improve future advertising efforts.

What is the ROAS Formula?

Below is the Return on Advertising Spend formula:

Return on Advertising Spend = Revenue Dollars / Advertising Spend Dollars

Why Return On Ad Spend matters

ROAS is essential for quantitatively evaluating the performance of ad campaigns and how they contribute to an online store’s bottom line. Combined with customer lifetime value, insights from ROAS across all campaigns inform future budgets, strategy, and overall marketing direction. 

By keeping careful tabs on ROAS, ecommerce companies can make informed decisions on where to invest their ad dollars and how they can become more efficient.

What ROAS is considered good?

An acceptable ROAS is influenced by profit margins, operating expenses, and the overall health of the business. While there’s no “right” answer, a common ROAS benchmark is a 4:1 ratio — $4 revenue to $1 in ad spend. Cash-strapped start-ups may require higher margins, while online stores committed to growth can afford higher advertising costs.

Some businesses require an ROAS of 10:1 in order to stay profitable, and others can grow substantially at just 3:1. A business can only gauge its ROAS goal when it has a defined budget and firm handle on its profit margins. A large margin means that the business can survive a low ROAS; smaller margins are an indication the business must maintain low advertising costs. An ecommerce store in this situation must achieve a relatively high ROAS to reach profitability.