ROAS

What ROAS means

ROAS stands for return on ad spend, the return on the advertising budget used. The formula is simple: revenue divided by advertising cost. A ROAS of 4 means one euro of advertising brought four euros of revenue. The figure is calculated per campaign, per channel or per product group and is the most common number for steering advertising.

What matters is what ROAS leaves out. It works with revenue, not profit. Cost of goods, shipping, returns, payment fees and staff cost stay outside. A ROAS of 4 can therefore still be a loss making business when the margin is thin and the return rate high.

ROAS, ROI and contribution margin

The three figures answer different questions and are often confused. ROAS says how efficiently advertising produces revenue. ROI puts profit in relation to the capital used and therefore includes cost. Contribution margin says what is left of a sale after variable cost.

For daily steering that gives an order. First the contribution margin of a product is determined, and from it follows the ROAS a campaign has to reach at minimum to pay for itself. That value is the break even ROAS and it is the decisive threshold. Everything above it makes money, everything below it costs money.

Where measurement fails

• Too short a window: counting only the day of the order misses orders that come days later. A window of seven to 30 days mirrors the decision path better.
• Double attribution: the same customer sees an ad and a video and buys afterwards. Without a clear rule the revenue is counted twice.
• Returns missing: ROAS grows with every sale, including the one that comes back. Net of returns it is smaller than the dashboard shows.
• Brand revenue: advertising on your own name pays for orders that would have arrived anyway. ROAS looks good there, the effect is small.

Frequent questions

• Which ROAS is good? There is no general value. It follows from the margin: the smaller the contribution margin, the higher the threshold.
• Is a high ROAS always good? No. A very high figure usually means the budget is too small and more demand exists.
• How often should I check it? Weekly for the trend, monthly for decisions. Daily values swing too much.