ROAS: Everything You Should Know About Return on Ad Spend

Sarah Berry is a Google Analytics-certified Web Marketing Consultant at WebFX. She's written over 400 articles on digital marketing, covering topics like SEO, CRO, and Amazon. When she isn't polishing her Time Magazine Person of the Year Award, she's spending time with her flock of ducks.

In the U.S., companies spend more than $125 billion on digital advertising, making a return on ad spend (ROAS) a critical metric for measuring success. No matter your sector, advertising budget, or strategy, you need to not only monitor and measure your ROAS but also maximize its performance. What is ROAS, though, and how do you calculate it?

The definition of ROAS is simple: ROAS, or return on ad spend, is a marketing metric that measures the performance and effectiveness of a digital advertising campaign.

By calculating ROAS, you can determine which ad strategies work well and apply those techniques to other ad campaigns.

ROAS Calculator

Keep reading to learn more about ROAS. Whether you’re curious about its meaning, formula, or comparison to return on investment (ROI), you can find all that information right here, plus access expert tips for improving yours.

If you need professional assistance and insight into your ROAS, WebFX can help. With our digital advertising services, we offer decades of experience to help reduce wasted ad spend, improve ad performance, and maximize ROAS.

Contact us online or call us at 888-601-5359 to learn more today!

What is ROAS?

ROAS assesses the performance and financial return of a digital advertising strategy, campaign, or ad group Return on ad spend, also known as ROAS, describes a marketing metric that assesses the performance and financial return of a digital advertising strategy, campaign, or ad group. Using and measuring this metric can help companies improve their ad strategies and monetary returns.

How to calculate ROAS with 1 simple formula

Use the ROAS formula, which divides your ad strategy’s total revenue by its total cost, to calculate your ROAS:

ROAS = Revenue / Cost

With this formula, your team can find your company’s unique ROAS value by determining the following:

  • The total revenue (in a dollar amount) generated by your ad strategy
  • The total cost (in a dollar amount) of managing your ad strategy

Once you have those two pieces of data, divide your total revenue by your total cost, and voilà! Your ROAS is expressed as a dollar amount and represents what your company earns back (on average) for every dollar spent on your ad campaign.

If yours equaled $5, for instance, that would mean your business earns $5 for every $1 spent.

Free ROAS Calculator: Get Your ROAS Now

[Example] How to use the ROAS formula

Check out the fictional example below to gain perspective on how to calculate your ROAS. Acme Industries promotes its widgets with a series of social media campaigns, as well as paid search campaigns. Right now, though, the company wants to calculate the return of its paid search efforts for the month.

It’ll use the ROAS formula to look at the revenue and cost of its paid search campaigns. The team totals its costs and discovers the following monthly expenses:

  • Ad spend: $2500
  • Software: $100
  • Management fees: $800
  • Total cost: $3400

Next, Acme Industries needs to calculate the revenue generated by its paid search campaigns. When it comes to estimating ad revenue, Acme Industries needs to consider a few factors.

First, they must determine how much a new lead is worth to their business. Second, they need to calculate the total profit margin for different purchases. Once they do that, they can calculate their ad revenue.

Following its calculations, Acme Industries finds:

  • 8 new leads (at $500 per lead): $4000
  • 3 new purchases of Product A (at $250 per purchase): $750
  • 1 new purchase of Product B (at $450 per purchase): $450
  • Total ad revenue: $5200

Now, the Acme Industries team can input all their data into the ROAS formula:

ROAS = Total Revenue / Total Cost

ROAS = $5200 / $3400

ROAS = $1.50

For Acme Industries, their paid search campaigns generate $1.50 (on average) for every $1 spent. Are you wondering whether Acme Industries earned a good ROAS from its ad strategy? Good, because you should!

Understanding whether you’re delivering a good, bad, or average return on ad spend is essential. It helps you and your team determine a benchmark for your ad strategies, as well as if your company can improve the performance of its ad campaigns.

How to calculate your break-even ROAS

Your break-even ROAS tells you how much money your ad needs to make to cover its cost. Calculating your break-even ROAS is extremely helpful if you’re just getting started with online advertising and want to figure out what your ROAS should be to help you earn a profit.

Before you can calculate your break-even ROAS, you need to know your average profit margin percentage.

To calculate your average profit margin, use this formula:

Average Profit Margin = Average Order Value – Average Order Costs

And to calculate your average profit margin percentage, you can use this formula:

Average Profit Margin % = (Average Profit Margin / Average Order Value) X 100

You can then calculate your break-even ROAS with this formula:

Break-even ROAS = 1 / Average Profit Margin %

Let’s put this formula into action with an example profit margin of 60%. In this case, 1/60% is 167%. That means you’ll break even at 167% ROAS.

If your ROAS is below this number, you’re losing money on your ad.

What is a good ROAS?

A good ROAS is usually $2 for every $1 invested A “good” ROAS depends on several factors, including your profit margins, industry, and average cost-per-click (CPC). Most companies aim for a 4:1 ratio — $4 in revenue to $1 in ad costs. The average ROAS, however, is 2:1 — $2 in revenue to $1 in ad costs.


What determines a “good” ROAS?

When it comes to determining a good ROAS for your company, you need to think about the following:

  • Your industry
  • Your profit margins
  • Your average cost-per-click (CPC)

Once you figure out these details, you can uncover the optimum dollar amount for your business.

Why should ROAS matter to your business?

Your ROAS should matter to your team and company for a few reasons, including: List of reasons why ROAS matters to businesses

  • Evaluate the average performance and financial return of your ad campaigns
  • Get accurate data for supporting ad spend increases, campaign budget changes, and more
  • Determine the most valuable and highest-performing ad campaigns, ad groups, and ads
  • Obtain a benchmark average for your ads to measure against future calculations
  • And more

Overall, calculating your ROAS informs your company and your team about the performance and quality of your ad campaign.

It provides you with actionable and insightful data that you can use to optimize your ad spend. If you skip the formula and guess about the performance of your ad campaigns, it becomes easy to waste your ad spend and diminish the number of leads and sales coming in from advertising.

How is ROAS different from ROI?

When talking about ROAS, it’s natural to ask how it’s different from ROI. ROI calculates how much your company makes from advertising (or another channel) after expenses, which includes operational costs, turnover, and more.

In comparison, ROAS determines how much your business earns (on average) from advertising only. Since they measure different aspects of your campaign, ROAS and ROI also use different formulas.

ROAS Formula ROI Formula

ROAs = Revenue / Cost

ROI = Net Profit / Total Investment*100

If you’re struggling to remember the differences between ROI and ROAS, think about the two from this perspective. ROAS measures your average return from advertising while ROI measures your total return from advertising.

3 ways your company can make its ROAS 10x better

Like your competitors, you want to improve your ROAS to maximize the performance of your ads.

With these three tactics, you can improve your ads and takes your return on ad spend to new levels:

1. Launch a branded PPC campaign

A branded PPC campaign, which targets your company’s name, can help your business earn a better return from your advertising efforts. Branded searches often generate conversions because users searching for a brand generally want to make a purchase or contact the company.

2. Use negative keywords

Negative keywords can also help improve your ROAS. With negative keywords, you prevent your ads from appearing in searches that feature those keywords. These keywords, while similar to your targeted keywords, tend to go outside the scope of your business, products, or services.

If your company runs a series of recruitment ads, for example, you may add these negative keywords:

  • Careers
  • Resumes
  • Job openings

Take a look at your ad campaigns and see where you can take advantage of negative keywords.

3. Optimize landing pages for speed, usability, and conversion

Your landing page, or where your ads send users when they click, can have a tremendous impact on your ad performance. Campaigns that use slow-loading, clunky-looking pages almost always throw away valuable leads and sales because those landing pages provide such an unfriendly user experience. If you want your landing pages to make buying your products or contacting your team easy, you need a fast, reliable, and easy-to-use page.

You can take care of these tasks in-house, though you’ll need a web designer and web developer. For a fast and long-term fix, think about landing page design and page speed optimization services.

Got a ROAS in the negatives? Get professional help from WebFX

No company, no matter how large or small, can afford a ROAS in the red.

When your ads fail to generate the revenue and results that your business needs, it places your company (and you) in a difficult spot. Professional ad management services from WebFX can take away the stress and worry over your ad campaigns and provide the results and revenue you need. Learn more about how our paid advertising services, from search to social, can help your business earn an impressive return on ad spend by contacting us online or calling us at 888-601-5359 to chat with a strategist about your goals, company, and more!

WebFX Careers

Join our mission to provide industry-leading digital marketing services to businesses around the globe - all while building your personal knowledge and growing as an individual.

We’re Hiring! View 30+ job openings!