ROAS stands for return on ad spend. It is the revenue your ads bring in divided by what you spent on them. Spend $1,000 on ads that produce $4,000 in sales and your ROAS is 4, which people also write as 4:1, 4x or 400%.
Whether a ROAS of 4 is good depends on your margin. Most of the confusion about ROAS starts there.
What does ROAS mean?
ROAS means the revenue you earn for each dollar you spend on advertising. You can work it out for one ad, a campaign or a whole account, and the math is the same on Google Ads, Meta, TikTok, LinkedIn or any other ad platform.
ROAS is a revenue metric. On its own it says nothing about profit, because it ignores what the product cost you to make and deliver. A ROAS of 3 can mean a healthy profit for one business and a loss for another.
What is the ROAS formula?
The ROAS formula is revenue from ads divided by ad spend.
ROAS = revenue from ads / ad spend
Ad spend is what you paid the ad platform. Some advertisers also count the cost of making the creative or the tools they use to manage ads. Either approach works if you apply it the same way every time.
Revenue from ads is the sales the platform credits to your ads. The platform's attribution settings decide which sales count, such as how many days after a click a purchase still gets credited.
Why does ROAS in my ad platform differ from what my own sales numbers show?
ROAS in an ad platform often runs higher than your own sales numbers because each platform credits sales using its own attribution settings. Two platforms can each claim the same order, so adding up the ROAS every platform shows you will overstate the total. Check platform ROAS against your own order data on a regular basis.
How do you calculate ROAS?
To calculate ROAS, divide the revenue your ads brought in by what you spent on those ads.
Say you sell a $40 desk lamp online. Last month you spent $600 on ads, and the platform credits those ads with 45 orders. Revenue from ads is 45 × $40 = $1,800. Divide by spend: $1,800 / $600 = 3. Your ROAS is 3, or 3:1.
Run the same math per campaign and the picture often changes. Suppose $400 of that spend went to one campaign that brought in $1,400, and $200 went to another that brought in $400. The first has a ROAS of 3.5 and the second has a ROAS of 2. The blended 3 hides the gap, so calculate ROAS at the level where you make decisions.
What is the difference between ROAS and ROI?
ROAS compares revenue to ad spend, while ROI compares profit to cost. ROI stands for return on investment.
Take a $40 desk lamp that costs you $24 to make and ship. Say $600 of ads brings in $1,800 in sales, a ROAS of 3. Those sales carry $1,080 in product cost, which leaves $720 in gross profit. After the $600 of ad spend you keep $120.
ROI on that ad spend is $120 / $600 = 20%. A ROAS of 3 sounded strong, but most of each sale went to the lamp itself.
Use ROAS to compare ads and campaigns against each other quickly. Use ROI, or profit after ad spend, to decide whether advertising is worth it at all.
What is break-even ROAS and how do you calculate it?
Break-even ROAS is the ROAS at which ad spend exactly equals the gross profit it brings in. Below it, every sale from ads loses money. Above it, you make some.
Break-even ROAS = 1 / gross margin
Gross margin is the share of the price left after the cost of the product, or (price minus cost per unit) / price. A $40 lamp that costs $24 to make and ship has a gross margin of ($40 − $24) / $40 = 40%. Its break-even ROAS is 1 / 0.40 = 2.5.
You can check it. At a ROAS of 2.5, $600 of ads brings in $1,500 in sales. At a 40% margin that is $600 in gross profit, which exactly covers the $600 you spent.
| Gross margin | Break-even ROAS |
|---|---|
| 20% | 5.0 |
| 25% | 4.0 |
| 33% | 3.0 |
| 40% | 2.5 |
| 50% | 2.0 |
| 60% | 1.67 |
| 75% | 1.33 |
Use a margin that includes every cost tied to a sale. Payment fees, shipping you cover, packaging and returns all come out of each order, and leaving them out makes break-even ROAS look lower than it is.
How do I work out break-even ROAS when my products have different margins?
When your products have different margins, work out break-even ROAS for each product or campaign using the margin of what it sells. For an account-wide figure, use the average margin of the orders your ads bring in, weighted by revenue. A campaign that mostly sells low-margin items needs a higher ROAS than the account average suggests.
What is a good ROAS?
A good ROAS is any ROAS above your break-even point that also leaves the profit you want. No single number holds for every business, because break-even ROAS moves with gross margin.
You will often hear 4:1 quoted as a rule of thumb. At a 20% gross margin, a ROAS of 4 loses money, because break-even is 5. At a 75% gross margin, common for software and digital products, a ROAS of 4 is very profitable.
To set a target with a profit goal built in, use this formula:
Target ROAS = 1 / (gross margin − profit margin you want after ads)
Say a product has a 40% gross margin and you want it to earn 10% of revenue after ad spend. Target ROAS = 1 / (0.40 − 0.10) = 3.33. At that ROAS, $600 of ads brings in $2,000 in sales and $800 in gross profit. After the $600 in ads you keep $200, which is 10% of $2,000.
Your goal moves the target as well. A company chasing growth may accept a thinner ROAS to win customers, while one protecting cash wants every campaign clearly above break-even.
Is a campaign below break-even ROAS worth keeping if those customers buy again later?
A campaign below break-even ROAS can be worth keeping if the customers it brings in come back for refills or renew a subscription. Compare what an average customer spends over time with what the ads cost to win them. Judge ads aimed at past customers apart from ads that find new buyers, because many past customers would have bought anyway.
How can you improve ROAS?
You improve ROAS by bringing in more revenue per dollar of ad spend or by cutting spend that brings in nothing. Each approach answers a different question.
| Approach | What it answers | What it misses |
|---|---|---|
| Cutting search terms, placements and audiences that do not convert | Which spend is wasted | Whether the spend that remains runs at a good time |
| Improving the landing page | How many clicks turn into orders | How many ready buyers arrive in the first place |
| Raising order value with bundles or a free shipping threshold | How much each order is worth | When people want to buy |
| Refreshing creative | Whether people still respond to the ad | Whether demand for the product has changed |
| Timing spend to demand windows | When buyers are ready | Weak creative or a slow page |
The first four approaches change the ad or the page. Timing changes when the ad runs.
Why is timing the lever most advertisers leave untouched?
Timing goes untouched because most advertisers spend at an even pace or react only after results change, while demand for most products rises and falls with events outside their account. When home sales climb for a third month, new owners replace the doorbell and the front door lock. When hiring rises month over month, companies shop for onboarding software.
While a build-up like that is under way, the same ad at the same bid reaches more people who are ready to buy. While demand is flat, the same dollars go to people who are not looking yet. Advertisers who wait for ROAS to climb before they add spend usually arrive after much of the rise has passed. Verdius spots that kind of build-up for you and sends an alert when the window opens.
The timing approach is to run ads when demand for your product is rising and pull back while it is flat. A demand window is a stretch of time, with a start and a stop, when demand for a product is rising. You keep a base level of spend and add to it inside those windows. The guide on when to increase ad spend covers how to raise spend into a window and bring it back down, and the best time to run ads looks at timing for different kinds of products.
Finding those windows ahead of time is the hard part, and Verdius does that step for you.
How does Verdius help with ROAS?
Verdius is software that predicts when demand for a product will rise and who to target then. It handles timing, the one approach to ROAS that changes when an ad runs instead of what it says.
For each product, Verdius finds optimal windows to run ads, each with a start and a stop, ranked against each other. Each window comes with:
- The events behind it, such as home sales climbing for a third month.
- The audience to reach, by age, income, location and interests, in the terms ad platforms already use.
- An alert when it opens and another when it closes.
It reads data from Google Ads, Meta, TikTok, Reddit, Snapchat, LinkedIn, Microsoft Advertising and ChatGPT Ads, plus Google Analytics and Search Console. You run the ads and set the budget. How Verdius finds windows explains the method, and the plans show what each one covers.