What is return on advertising spend (ROAS)?
Return on advertising spend (ROAS) is a marketing metric that refers to the amount of revenue earned for every dollar spent on a specific ad campaign or across an entire advertising budget. Marketers use ROAS to analyze campaign performance and identify what’s working best and driving the most revenue for them.
Even if a campaign delivered users with high lifetime value (LTV), if a brand spent more than it gained from those users, the campaign could be considered a success. This is why ROAS is considered the golden metric for performance-focused marketing.
Often expressed as a percentage, ROAS can be used by marketers to measure the efficacy of their advertising efforts, especially when they are scaling their ad spend.
How to calculate ROAS
ROAS can be calculated based on an entire marketing budget, on individual campaigns, or on specific marketing programs. Calculation for ROAS is based on the revenue attributable to advertising compared to the cost of advertising.
To calculate ROAS, simply divide the ad revenue by the cost of the related advertising.
The breakeven point for ROAS is 100%. This is when the amount you acquired in revenue is equal to the amount you spent on advertising to acquire that revenue. So, the ROAS for any ad program would be over 100% if ad revenue is greater than its cost.
For example, imagine you spend $1,000 on a Google Ads user acquisition campaign. After it ends, you see that the campaign has generated $5,000 of revenue from new users acquired. To calculate ROAS, you would use the ROAS formula to divide $5,000 of generated revenue by $1,000 of advertising cost:
Your marketing campaign’s ROAS is 500%. For every $1 spent, you generated $5 in revenue.
What is a good ROAS? Generally, a positive ROAS — anything over 100% — is good. A benchmark of 4:1, meaning you earn $4 for every $1 spent, is considered a high ROAS in most industries.
The importance of accurate attribution
Attribution is critical to ROAS calculations because it helps marketers understand which touchpoints or marketing channels are responsible for revenue generation. Depending on which attribution model you use, your ROAS may differ.
For example, consider you invest in paid social media to grow your e-commerce business’ mobile app. You spend $500 on a Facebook ad campaign and generate $2,000 in total revenue from in-app purchases.
Now, let’s factor in the customer’s complex path to purchase: they saw the Facebook ad, clicked it, went to your website, then saw a TikTok ad, clicked it, downloaded your app, then made a purchase.
Using a last-click attribution model — one that attributes 100% of the conversion credit to the last touchpoint before purchase — the Facebook ad would not receive any credit. So, the ROAS would be 0. Using a first-click model, the Facebook ad would receive full credit for the $2,000 in revenue, giving you a ROAS of 400% ($2,000 revenue / $500 cost of ads).
It’s important to select an attribution model that makes the most sense for your business, industry, and customers — and apply it consistently across ad platforms and channels so you can accurately compare campaign effectiveness. By tracking ROAS as a KPI over time, marketers can make smarter decisions about their marketing budgets and digital advertising campaigns.
ROAS vs. ROI
ROAS and ROI (return on investment) are important metrics in digital marketing and advertising. While they both measure the effectiveness of campaigns and marketing strategies, they differ in several ways:
- ROAS helps advertisers understand how well their campaigns perform in terms of sales or revenue generation. It is typically used only in the context of advertising and marketing. ROAS measures the short-term impact of campaigns but reflect other important outcomes like brand awareness, customer lifetime value (LTV), or loyalty.
- ROI is a broader metric used to measure the overall profitability of an investment. It is used by many teams and departments across an organization to measure the gain or loss generated from an investment decision. Unlike ROAS, it considers more than just ad spend; it accounts for any and all costs associated with the investment, including vendor costs, overhead fees, etc.