ROAS Calculator (Return On Ad Spend)
What is Return On Ad Spend (ROAS)?
Return On Ad Spend (ROAS) is a critical marketing metric that measures the amount of revenue earned for every dollar spent on advertising. Unlike ROI, which accounts for overall profitability, ROAS specifically looks at the efficacy of your advertising campaigns. It is the primary KPI for e-commerce businesses and performance marketers using platforms like Facebook Ads, Google Ads, and TikTok Ads.
How to Calculate ROAS
The formula for calculating ROAS is relatively simple, yet powerful:
For example, if you spend $1,000 on Google Ads and those ads generate $5,000 in revenue, your ROAS calculation would be:
$5,000 / $1,000 = 5:1 (or 500%).
This means for every $1 you spent on ads, you got $5 back in revenue.
ROAS vs. ROI: What's the Difference?
While often used interchangeably, ROAS and Return on Investment (ROI) tell different stories:
- ROAS focuses solely on gross revenue generated from ad spend. It answers, "Did the ads drive sales?"
- ROI accounts for all expenses, including cost of goods sold (COGS), shipping, agency fees, and the ad spend itself. It answers, "Was the campaign profitable?"
What is a Good ROAS?
A "good" ROAS varies significantly by industry, profit margins, and campaign goals. However, here are some general benchmarks:
- Below 3:1 (300%): Often considered risky unless you have very high profit margins. You might be losing money after factoring in product costs.
- 4:1 (400%): The industry standard target. If you spend $100 to make $400, you likely have enough buffer to cover product costs and operations while making a profit.
- 5:1 (500%) and above: Considered excellent. This indicates a highly efficient campaign that allows for aggressive scaling.
Understanding Break-Even ROAS
To truly understand if your ads are profitable, you must calculate your Break-Even ROAS. This is the ROAS point where you are neither making nor losing money.
The formula depends on your profit margin:
Example: If your profit margin is 50% (0.5), your Break-Even ROAS is 1 / 0.5 = 2.0. This means you need a ROAS of at least 2.0 just to cover your costs. Any ROAS above 2.0 is pure profit.