In the simplest of terms, if you spent $100 on an online ad, and later figured out the ad had netted you revenue of $101, your ad would theoretically have turned you a profit. But is that a good return on ad spend?
No! Of course not — in fact, it’s terrible. Yes, you made a dollar of profit, but will that dollar cover the hours and hours of work you spent writing the copy, designing the creative, and studying where best to place the ad? That’s not to mention all the time and effort spent researching your ideal customer, learning what could lead to them making a conversion and becoming loyal to your brand.
This is why return on ad spend (ROAS) is a key metric in marketing: It quantifies the revenue generated by a brand in relation to the amount of money invested in an advertising campaign. I’ll break it down in a moment, but for now, know that if you’re not tracking your ROAS, you may be throwing away money and missing out on customers and sales. On the other hand, if you’re only tracking ROAS, you may be missing the bigger picture and similarly missing out on opportunities while also wasting cash.
Higher ROAS beyond Search & Social. Realize it.
What Is Return On Ad Spend (ROAS)?
“ROAS is simply the revenue (or return) you get for each dollar you spend on advertising,” reiterates John Jackson, founder of Hitprobe. “It’s an essential metric to know so you can assess the effectiveness of your campaigns and where it might be worth allocating more of your marketing budget. It’s calculated using a simple formula: Basically, the revenue generated from ads divided by the cost of the ads. For example, if you spend $500 on an ad campaign and generate $2,000 in revenue, then your ROAS is 4:1, or 400%, and you’re earning a healthy $4 for every $1 spent.”
Why Is Return on Ad Spend Important?
If you don’t know how much revenue your ads are actually generating, you don’t know if they’re worth it, even if they’re causing plenty of engagement. “ROAS is essentially the easiest way to figure out whether your ads are pulling their weight,” says Chris Coussons, founder of Visionary Marketing. “It’s simple, but it gives you a really clear picture of whether your advertising is actually working or just burning through budget. Look at ROAS as a core metric because it cuts through vanity numbers like impressions or clicks: Those are useful to a point, but if they’re not converting into actual revenue, they don’t mean much.”
ROAS is a key performance indicator (or KPI) that helps a brand evaluate the success of advertising efforts by quantifying the revenue generated for every ad dollar spent. It might help you realize that, e.g., while your ads placed on Facebook have a mere 2:1 revenue-raising rate, on TikTok it’s 4:1. In that case, it’s easy enough to decide to bail on the former and pile on with the latter, but without analyzing your ROAS, you wouldn’t have figured that out.
How to Calculate and Express Return on Ad Spend
Calculating ROAS involves relatively simple math, but you need to make sure you’re using all the right numbers. Keep careful records of your ad spend and make sure you have all the accurate and relevant data for a clearly defined period of time, especially if you use ongoing ads (as opposed to a week-long campaign on Instagram, for example).
To calculate Return on Ad Spend, divide the total revenue generated by an ad campaign by the total cost put into that campaign, and then multiply by 100 to get a percentage. For example, if your campaign netted $5,000 revenue on an ad spend of $1,000, you’d get the number five. Which, multiplied by 100, is 500, or a 500% return on the spend.
5,000 ÷ 1,000 = 5
5 x 100 = 500
You can also express it as a ratio, which in this example would be 5:1, or five dollars earned per dollar spent. The higher the ROAS, the more successful the campaign.
Considerations When Calculating ROAS
As long as you have all of your data carefully accounted for, it shouldn’t be that hard to get an accurate sense of your return on ad spend. What’s important is that you think beyond just the dollar amounts.
“We always remind clients not to focus on ROAS in isolation,” says Coussons. “It’s important, but it doesn’t tell the full story. We also look at customer lifetime value, conversion rate, and how different channels support each other. For example, someone might click on a Facebook ad but end up converting later through email or search. If you’re only looking at ROAS from one channel at a time, you could miss the bigger picture. So, while ROAS helps you track what’s working right now, combining it with other data is how you make smarter decisions long term.”
ROAS or ROI?
ROI, or return on investment, is a financial metric used in all sorts of situations, from stock markets and hedge funds to direct investment in a business to, in some ways, testing how well ad spend is working. It’s less specific than ROAS, and may be a way of looking more broadly at your business’ success.
That bigger picture can also cloud things over, though — for example, an overall decent ROI may conceal the fact that your ROAS is actually quite poor. That’s because while both ROI and ROAS measure the effectiveness of investments, ROI considers the overall profitability of an investment, and ROAS focuses specifically on the revenue generated by advertising spend.
It’s like looking at the whole of a vehicle that works well while ignoring a leak in the gas tank. Sure, it gets you down the road, but if you don’t analyze and fix that specific problem, it will never work as efficiently as it could.
When to Use ROAS
“Among all the metrics of digital marketing, ROAS stands as the most authentic indicator, because it eliminates vanity measurements to present the actual financial value of your advertising expenditures,” says Tez Ferguson, CEO and founder of Xploited Media. “The highest possible ROAS shows that every strategic and timing element — alongside your audience selection — worked together perfectly to generate actual earnings, instead of basic click activities.”
Simply put, when you need to know if your online ads are working, zero in on them by studying your return on ad spend.
When to Use ROI
When you need a good sense of the overall efficacy of your marketing initiatives, look at ROI instead of the more focused ROAS. ROI can factor in things like money spent on research (both keyword research and studying potential customers), audience segmentation, design, and more, whereas ROAS usually looks just at the actual cost of the ads you place.
Put simply, ROAS is a part of ROI, whereas ROI is a bigger umbrella than ROAS. There is a time to study them both, but when you’re looking at your larger budget and the overall profitability of your business, return on investment is where to focus.
Best Strategies to Optimize Your ROAS
If you want to really see what your ad spend dollars are doing, you do so by checking that ROAS. “As far as I’m concerned, ROAS is the most important KPI in a marketing department, because at the end of the day, we’re here to help our company sell,” says Josh Stutt, head of marketing at The49. “Impressions, followers, brand image, etc. are all nice, but if we’re not generating sales from the money we spend, then we’re not doing our job.”
To make sure your ROAS is optimized to the fullest, try a few of these ideas:
Segment Your Audience
Make sure your ads target people in specific demographics, with related interests, and who have displayed behaviors that track with your campaign (and brand and products) to ensure your ads reach the most relevant people.
Use A/B Testing
Not sure which ads will work best? Run two or three different campaigns and let the data speak for themselves. You don’t have to run massive ad campaigns: You can run a few targeted ads with smaller spends and see if one (or more) are clearly performing better, then put more ad spend there.
Make Sure Your Site Syncs With Your Ads
An ad with a particular look and tone that leads to a website/app that feels markedly different — or, even worse, that doesn’t have the same advertised products and services readily available — will lead to a high bounce rate, meaning you might have just paid for a click for nothing.
Create Ads That Fit Their Placement
Making an ad for TikTok? It better be a snappy, short-form video. Going for Facebook? A static post accompanied by text may be just fine. Placing ads on LinkedIn? Then be sure they are professional-looking. On it goes: An audience wants to engage differently on one platform to the next, and your ads have to make sense in their context.
Remember, too, that sometimes the issue might not be the ads themselves, but the placement, says Vikrant Bhalodia, head of marketing and people ops at WeblineIndia. “One thing I like to do is look at ROAS by funnel stage,” he says. “A cold traffic campaign might show low ROAS, but if it warms up the right audience and helps retargeting do better, it still matters.”
Key Takeaways
“ROAS is an important metric that helps advertisers measure the profitability of their ads,” says digital marketing consultant Jordan Stevens. “Often expressed as a multiplier (3x) or a ratio (3:1), it tells you that for every dollar you spend on your ads, you earn X amount back. For example, a ROAS of 2:1 means that you’ll earn two dollars for every dollar spent.”
Generally, you should aim for a 4:1 ROAS or better, though in some businesses with smaller up-front costs, a lower ROAS may be fine. For example, if your business is purely digital in nature, such as a consulting firm, there is little overhead for products, shipping, and such, so a 3:1 or even a 2.5:1 ROAS may be fine.
To achieve the best return on ad spend, study and then target your audience, try A/B testing, don’t confuse clicks or other actions with actual revenue, do create compelling ads that fit their placement, and by all means make sure the site or app to which an ad leads is welcoming, easy to navigate, and optimized to create conversions.
Frequently Asked Questions (FAQs)
What ROAS is considered good?
In digital marketing for an e-commerce business, a good ROAS is generally considered to be 4:1 or greater. That means, for example, if you spent $500 on ads, you’d see $2,000 in revenue. Or, in simpler terms, for every dollar spent, you’d earn four.
How is ROAS used in mobile marketing?
There’s no great difference in how you track ROAS in mobile marketing compared to greater digital strategies, except that you will be analyzing spend versus revenues only from ads optimized for a mobile user experience, which is largely to say revenue earned via ads in apps.
What is a break-even ROAS?
As with other things in life, break-even ROAS is when you earn back what you spent, which is to say you don’t lose any money, but you don’t make a profit. You will have effectively wasted time and effort: Sure, achieving a break-even return on ad spend means you’re not losing money, but it’s not a good or sustainable long-term strategy. The goal should be to achieve a ROAS significantly higher than the break-even point to ensure healthy profit margins.
What is a target ROAS?
Your target ROAS is the ratio you intend to earn with a given ad spend.
