ROAS (Return on Ad Spend)

A measure of revenue generated per dollar of marketing spend.

What is ROAS?

ROAS stands for Return On Ad Spend and is a very popular metric in digital marketing and is a similar alternative to ROI or Return on Investment.  ROAS is commonly used in eCommerce businesses to evaluate the effectiveness of a campaign.

It should be noted that having a high return on ad spend does not necessarily mean a company is profitable, as there may be many other expenses that have to be deduced to arrive a net profit margin.

ROAS return on ad spend example


What is the ROAS formula?

Below is the Return on Advertising Spend formula:

Revenue Dollars / Advertising Spend Dollars

See an example in Excel here.


Example calculation

An eCommerce company spends $100,000 on a Google AdWords campaign and generates $250,000 of product sales on their website, directly from those ads.

Revenue = $250,000
Advertising = $100,000

= $250,000 / $100,000

ROAS = 2.5

If ROAS > 1 then you are at least covering your marketing expense with revenue, but are likely losing money after deducting expenses.  In general, a ROAS of 3 or more is considered “good”.


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Challenges with ROAS

Revenue is not necessarily a good indication of economic benefit, and for this reason, Return On Ad Spend may be considered a vanity metric.  A vanity metric is a figure that managers/owners chance mostly due to ego, and doesn’t contribute to long-term business viability.

A better metric of economics is Contribution Margin, which is equal to revenue less variable costs, such as cost of goods sold (COGS) and shipping.  For many eCommerce businesses cost of goods sold and shipping are major expenses, and may not leave much a return.

To learn more about ROAS and contribution margin, check out our online course on eCommerce Financial Modeling.  This course will who you step by step how to model the economics of a marketing campaign for an eCommerce business.


More learning

Thank you for reading this guide to Return On Ad Spend.  To learn more about other types of return on investment you may want to check out:

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