What Is ROAS, and What Counts as Good for a Small Business

ROAS (Return On Ad Spend) is the one metric every business owner who runs ads has to know. It answers a single question: for every shekel I spent on advertising, how much revenue did I get back?

How to calculate ROAS

The formula is simple: revenue from the campaign divided by spend on the campaign. Spend 1,000 and make 4,000 in sales, and your ROAS is 4 — that is 4x, or 400%.

What counts as a good ROAS?

There is no single magic number, because it all depends on your margins. The common mistake is judging ROAS without factoring in profit:

• If your margin is 30%, you need a ROAS of about 3.3x just to break even.
• If your margin is 60%, a ROAS of 1.7x already covers the ad cost.

So a high-margin product can be profitable at a relatively low ROAS, and vice versa.

ROAS versus real profit

ROAS measures revenue, not profit. To know whether you are actually making money, work out your break-even ROAS — the ratio at which ads return exactly what they cost — and make sure you are above it. Then remember repeat customers: a buyer acquired at 1.5x on the first order can be very profitable if they keep coming back.

Takeaways

• Calculate ROAS per campaign, not just as one blended average.
• Set your ROAS target from your margins, not from a gut feeling.
• Look at lifetime customer value, not only the first purchase.