What Is ROAS? Return on Ad Spend Explained
DEFINITION
Return on ad spend is the revenue attributed to advertising divided by the cost of that advertising. It is expressed as a ratio or a multiple: a ROAS of 4 means four units of attributed revenue for every one spent.
ROAS is the most quoted number in eCommerce advertising and one of the easiest to misread. It says nothing about margin, nothing about whether the sale would have happened anyway, and when it is summed across platforms it routinely claims more revenue than the business actually took.
ROAS becomes useful the moment you know what your break-even figure is.
- The formula
How ROAS is calculated
One division, and three decisions hidden inside it.
FORMULA
ROAS = Revenue from advertising ÷ Advertising cost
Revenue from advertising
Attributed revenue, which means the figure depends entirely on your attribution model. Last-click, data-driven and platform-reported figures will all give you a different answer from the same week of trading.
Advertising cost
Media spend at minimum. If you want the number to inform a decision rather than to report an activity, include agency fees, tools and creative production too.
The result
A ratio, not a margin and not a profit. A ROAS of 4 is excellent on a 60% contribution margin and loss-making on a 20% one.
ROAS is sometimes written as a percentage. A ROAS of 4 and a ROAS of 400% are the same number.
- Worked example
The same ROAS, two different outcomes
Two channels, identical ROAS, and only one of them is making money. The difference is contribution margin.
Line
Channel A
Channel B
Attributed revenue
40,000
40,000
Ad spend
10,000
10,000
ROAS
4.0
4.0
Cost of goods (of revenue)
45%
68%
Fulfilment and payment costs
4,800
6,400
Returns
2,000
4,800
Contribution after ad spend
+5,200
−8,400
Verdict on the same ROAS
Profitable
Loss-making
Illustrative figures chosen to make the arithmetic visible, not a benchmark. The point is that ROAS alone cannot distinguish these two channels.
- The number that matters
Break-even ROAS
This is the figure to calculate before you set any ROAS target. It comes from your own margin, not from an industry article.
FORMULA
Break-even ROAS = 1 ÷ Contribution margin
At 35% contribution margin
Break-even ROAS is about 2.9. Below that, every additional pound of spend costs you money, however good the campaign looks in the platform.
At 20% contribution margin
Break-even ROAS is 5.0. A ROAS of 4 that another brand celebrates would be steadily losing you money.
At 60% contribution margin
Break-even ROAS is about 1.7, which is why high-margin categories can outbid everybody else and still profit.
Contribution margin here means after cost of goods, fulfilment, payment fees and returns — not gross margin. Using gross margin produces a break-even figure that is comfortably too low.
- Reading it properly
What ROAS does and does not tell you
Four things worth holding in mind every time the number is quoted in a meeting.
It ignores margin entirely
- Two businesses with identical ROAS can have opposite outcomes
- A ROAS target set without a margin figure is arbitrary
- High-margin categories can sustain far lower ROAS
- Discounting lowers margin and therefore raises break-even ROAS
Platform figures double-count
- Each platform claims conversions the others also claim
- Summed platform revenue routinely exceeds actual revenue
- Blended ROAS, or MER, cannot double-count
- Use platform ROAS to optimise, blended ROAS to decide
It says nothing about incrementality
- Branded search shows excellent ROAS and often adds little
- Retargeting reaches people already likely to return
- The question is what would have happened without the ad
- Holdout tests answer this; attribution never will
It trades off against volume
- Raising ROAS usually means spending less on broader audiences
- The highest-ROAS account is rarely the largest business
- Contribution in currency matters more than ROAS as a ratio
- Decide which you are optimising before you optimise
The question is almost never what our ROAS is. It is whether the last pound spent produced more than a pound of contribution.
- Common mistakes
Three ways ROAS gets misread
Each of these appears in accounts we take over more often than not.
Adding platform ROAS together
Three platforms each reporting a 4.0 ROAS do not combine into a 4.0 blended ROAS. They are each claiming overlapping conversions, and the sum of their reported revenue frequently exceeds what the business actually took.
Setting a target from an industry article
A published ROAS benchmark averages businesses with different margins, price points and categories. Your break-even ROAS is a property of your own margin structure and takes two minutes to calculate.
Optimising ROAS instead of contribution
The easiest way to raise ROAS is to spend only on branded search and retargeting. It produces a beautiful report and a shrinking business, because the spend that creates new demand is the spend that looks worst.
Our article on why ROAS reports hide margin problems works through all three with the arithmetic.
- Related terms
Terms that travel with this one
ROAS only makes sense alongside these.
The Amazon equivalent, expressed as a cost percentage rather than a revenue multiple. ACoS and ROAS are reciprocals of each other.
MER
Marketing efficiency ratio: total revenue divided by total marketing spend. The blended figure that cannot double-count across platforms.
Contribution margin
What remains from net revenue after goods, fulfilment and marketing. The number your break-even ROAS is calculated from.
CAC
Customer acquisition cost. ROAS per order, viewed from the cost side rather than the revenue side.
Incrementality
Whether advertising produced sales that would not otherwise have happened. The question ROAS cannot answer.
Revenue per order. Raising it raises ROAS at constant spend, which is why it is the least painful lever available.
- Questions
ROAS FAQs
The questions we are asked most often about this number.
What is a good ROAS?
There is no universal answer, and any article giving you one is averaging businesses that have nothing in common. A good ROAS is comfortably above your break-even ROAS, which is one divided by your contribution margin. At 35% contribution margin, break-even is about 2.9; at 20% it is 5.0.
How do I calculate break-even ROAS?
Divide one by your contribution margin expressed as a decimal. Contribution margin means net revenue after cost of goods, fulfilment, payment fees and returns — not gross margin, which produces a break-even figure that is too low and a target that quietly loses money.
What is the difference between ROAS and ACoS?
They are the same relationship inverted. ROAS is revenue divided by spend; ACoS is spend divided by revenue, expressed as a percentage. A ROAS of 4 is an ACoS of 25%. Amazon uses ACoS; most other platforms use ROAS.
Why do my platform ROAS figures not match my actual revenue?
Because each platform claims credit for conversions it can see, and several platforms can see the same conversion. Summed platform-reported revenue often exceeds what the business actually took. Blended ROAS, calculated from your real revenue and total spend, cannot have this problem.
Should I include agency fees in ad spend?
If you want the number to inform a decision, yes. Media spend alone understates what customer acquisition actually costs, sometimes by a third or more once agency, tooling and creative production are counted. Keep media-only ROAS for campaign optimisation.
Is a very high ROAS always good?
Not necessarily. Accounts with exceptional ROAS are often spending almost entirely on branded search and retargeting, which reaches people who were already going to buy. The report looks excellent and the business stops growing.
How does discounting affect ROAS?
It raises reported ROAS and lowers contribution margin at the same time, which also raises your break-even ROAS. A promotion can improve the ROAS number while making the campaign less profitable than it was before.
Can you work out our break-even ROAS?
Yes, and it is part of the free eCommerce audit. It requires your cost of goods, fulfilment costs and returns rate, and it usually takes longer to gather the numbers than to do the arithmetic.
- Keep reading
Related resources
Where to go once you have your own break-even figure.
INSIGHT
The full argument, with the arithmetic, on why a healthy ROAS can sit on top of an unprofitable channel.
TEMPLATE
A workbook that calculates blended ROAS and contribution margin from eight figures a month.
DEFINITION
The Amazon equivalent, and how break-even ACoS is calculated from the same margin figure.
Do you know your break-even ROAS?
Most brands we speak to do not, which means their targets were set by convention rather than by arithmetic. A free eCommerce audit calculates it from your own margin and tells you what your current spend is really returning.