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Return on Ad Spend (ROAS)

Metric
ROI

Definition

The revenue generated for every dollar spent on advertising

Related Knowledge

Attribution Models
ROAS=Revenue from AdsAd SpendROAS = \frac{\text{Revenue from Ads}}{\text{Ad Spend}}

What "Good" Looks Like

"Good" ROAS depends heavily on gross margin and business model.

  • Low-margin e‑commerce (for example, 30% gross margin)
    • Needs at least 3.3x ROAS just to cover product cost.
    • That is before operations, salaries, or profit.
  • High-margin software (for example, 80% gross margin)
    • Can be profitable at much lower ROAS, because each dollar of revenue has more contribution margin.

    • ROAS also varies by channel and funnel stage:

  • Retargeting
    • Often shows 5-10x ROAS because it targets warm audiences who already know the brand.
  • Prospecting / cold acquisition
    • Might only show 1.5-2x ROAS, but is essential to fill the top of the funnel.

    • The key is to judge ROAS relative to your margins, funnel role, and strategy, not by a universal benchmark.

    ROAS vs. ROI

  • ROAS
    • Only considers ad spend in the denominator.
    • ( ROAS = frac{text{Revenue from Ads}}{text{Ad Spend}} )
  • ROI (Return on Investment)
    • Accounts for all costs, such as:
      • Creative production
      • Agency fees
      • Team salaries
      • Product costs
      • Tools and overhead

    • A campaign with 4x ROAS can still have negative ROI once you factor in all non-media costs.

    The Attribution Problem

    ROAS is only as accurate as your attribution model.

  • If tracking wrongly attributes sales to an ad that did not actually drive them, ROAS is inflated.
  • Privacy changes (for example, iOS updates) have made platform-reported ROAS less reliable.

    • Many growth teams now compare:

  • Platform-reported ROAS (for example, from Meta, Google)
  • Blended ROAS = ( total revenue/total ad spend) across all channels

    • If platform numbers look great but blended ROAS is flat or falling, your "amazing" ROAS may be mostly an attribution illusion.

    Short-Term vs. Long-Term ROAS

  • Short-term or immediate ROAS
    • Only counts purchases during or shortly after the campaign window.
  • LTV-based ROAS
    • Factors in repeat purchases or subscription renewals over time.

    • A campaign can look unprofitable in week one but excellent over twelve months.

    Example scenario

  • You spend $100 on ads.
  • You acquire a customer who pays $50 today and another $50 next month.

    • Short-term view:

  • Week 1 ROAS:
    • Revenue = $50
    • ROAS = 0.5 (or 50%)
    • "We lost money! Turn off the ads!"

    • LTV view:

  • Over 2 months:
    • Revenue = $100
    • ROAS = 1.0 (break-even), and could look even better if they keep buying.

    • The good analyst connects ROAS to LTV and payback period, not just day‑one numbers.