Guide to Return on Ad Spend (ROAS)

Insight

What is ROAS?

Return on Ad Spend (ROAS) is a marketing efficiency metric that shows how much money you generate for every marketing dollar that you spend. It is one of KPIs that many eCommerce brands use every day.

Read on to learn about how to calculate ROAS and why this metric has the potential to damage your marketing program—and even your brand.

ROAS Formula

To calculate ROAS, divide your brand's revenue by its total marketing spend over a particular time period: 

ROAS Formula (total revenue divided by marketing spend)
Remember that when you calculate ROAS (and any other metric), you use data from the same time period in all parts of the equation. Otherwise, the result will be inaccurate.

Example of a ROAS Calculation

If your brand has a monthly Facebook marketing budget of $10,000, and at the end of the month, you drove a total of $40,000 in sales, it means that you have a ROAS of 400%. This can also be displayed as a dollar amount, a number, or a multiplier: $4, 4, or 4x.

Is ROAS Overrated?

It's time for some controversy. Although ROAS is a standard metric in eCommerce, we would heavily caution against using it as your sole measure of marketing success and trying to optimize based on it. Here's why:

ROAS measures efficiency, and that is all that it measures. In the example above, if you have a marketing budget of $10,000 and you drive $40,000 in sales, you have a calculated ROAS of 4. However, that 4 tells you nothing about how much money you actually made: the return on ad spend formula is based on revenue, which a top-line figure. You could be thrilled with a ROAS of 4, and in reality, you could be barely breaking even (or even losing money!), because the metric tells you nothing about what actually matters in the end: profit.

At Daasity, we recommend tracking ROAS in conjunction with other metrics in order to get a true picture of your marketing performance. ROAS is useful for providing a high-level view of what's going on with your marketing dollars—and if anything changes dramatically over a short period of time, it's time to investigate—but in many cases, it can be little more than a vanity metric. We would recommend focusing more on metrics such as contribution margin, AOV, CPA/CPO, and conversion rate.

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