ROAS (Return on Ad Spend)

How to calculate ROAS

ROAS (return on ad spend) has two ingredients: how much you spent on ads, and how much revenue those ads were given credit for. Credit means an ads platform looked at who bought and decided the ads deserved those orders. Divide the credited revenue by the ad spend.

Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. In June the drink brand spent $10,000 on Instagram and Facebook ads. Meta's ads manager (the screen where Facebook and Instagram ads are run) said those ads led to $40,000 of website orders. $40,000 divided by $10,000 is a ROAS (return on ad spend) of 4. People write that as 4, 4x, or 400%. All three mean the same math.

Credit is the important word in ROAS (return on ad spend). Meta did not hand the drink brand $40,000 in cash. Meta looked at who bought a case, and decided the Instagram and Facebook ads deserved credit for those $40,000 of website orders. Google Search ads might claim some of the drink brand's same orders. That is why platform ROAS can look better than the money that actually hit the bank.

Use the same dates on both numbers in a ROAS (return on ad spend) calculation. If the drink brand's $10,000 of ad spend is from this week and the $40,000 of credited sales is from last month, the ratio is junk.

Break-even ROAS

A ROAS (return on ad spend) of 4 is not 4x profit. The formula only looks at ad spend. For a drink brand selling a low-sugar sports drink, it ignores what it cost to make the drink, ship it, run the warehouse, and handle returns.

Break-even ROAS (return on ad spend) is 1 divided by gross margin. Gross margin is the slice of each sale left after the product itself is paid for. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. If the drink brand keeps 50 cents of every dollar after ingredients and bottling, they need a ROAS of 2 just to cover the drink (1 ÷ 0.50 = 2). If the drink brand only keeps 25 cents of every dollar, they need a ROAS of 4. That still skips fees, discounts, and whether the customer would have bought without seeing an ad.

Blended ROAS (return on ad spend: all credited sales across every ads channel, divided by all ad spend) is a different number from one campaign's Meta ROAS. A campaign is one group of ads with its own budget. Do not mix blended ROAS and one-campaign Meta ROAS in the same sentence.

Why ROAS matters

ROAS (return on ad spend) is the fast number. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. The drink brand's media buyer can open Meta (Facebook and Instagram ads) and see ROAS without waiting for finance. Teams use ROAS to give more budget to ads that look like they are paying for themselves, and to cut ones that are not. Agencies use ROAS to show a client whether paid ads are covering themselves this month.

ROAS (return on ad spend) is a starting point, not a verdict. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. A campaign (a group of ads with its own budget) that introduces new 55-year-old runners to the drink can look worse on ROAS than a campaign that nags people who already have the drink in their cart. Both jobs matter.

How to read ROAS

There is no universal good ROAS (return on ad spend: credited ad sales divided by ad spend). It depends on your margin, how often customers come back (lifetime value), and whether those sales would have happened anyway. Two businesses with a 4x ROAS can have completely different costs and still both be telling the truth.

Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. When the drink brand's ROAS (return on ad spend) drops, the team should not pause the ads first. Check these questions:

• Did the drink brand move money into a different kind of campaign (for example, more ads to people who have never heard of the drink, and fewer ads to people who already visited the shop)?
• Did click-through rate (how often people tap the ad after seeing it) or conversion rate (how often a visit to the drink brand's website becomes an order) move?
• Did the credit window change (how many days after a click Meta still counts a sale), or did tracking break, so Meta is missing drink-brand sales it used to count?

Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. Google ads and Meta ads (Facebook and Instagram) will both claim some of the drink brand's same website orders. That overlap makes every channel look better than it is. Platform ROAS (return on ad spend: credited sales divided by that channel's spend) is not the same as incrementality (extra sales the ads actually caused). MER (marketing efficiency ratio: all company revenue divided by all ad spend) is the check that ignores who got credit.

Common ROAS mistakes

• Comparing Meta ROAS (return on ad spend on Facebook and Instagram) to Google ROAS as if the two platforms counted sales the same way. They do not.
• Chasing a high ROAS on a tiny campaign. Let's take a drink brand as an example. They sell a low-sugar sports drink for active women over 50, mostly from their own website. The drink brand could get a 12x ROAS on $200 of spend and still not grow the brand.
• Treating last-click ROAS (return on ad spend that gives all credit to the last ad someone clicked) as the truth for ads whose job is to introduce the drink, not to close the sale. See attribution.

Need the cost of one order instead of a ratio? Use CPA (cost per acquisition: ad spend divided by the conversions you named). Need to know if the ads caused extra sales? Use iROAS (incremental return on ad spend: extra revenue divided by ad spend).