Understanding and using ROAS correctly
Return on Ad Spend is the key currency in performance marketing – but only if you interpret it correctly.
Return on Ad Spend (ROAS) measures the efficiency of your advertising spend. Unlike ROI, it focuses exclusively on ad budget and resulting revenue. This makes it the central control metric for Google Ads, Meta Ads and other performance channels.
ROAS vs. ROI: The crucial difference
While ROI (Return on Investment) considers all costs and profit, ROAS focuses on the ratio of ad revenue to ad costs. A ROAS of 5 means: $5 revenue per $1 ad spend. Whether that's profitable depends on your margins.
Calculate your break-even ROAS: With 25% margins, you need at least a ROAS of 4 to break even (100 / 25 = 4).
How to calculate the optimal target ROAS
The optimal ROAS depends on your business model:
- 1 Determine contribution margin: What margin do you have after deducting all variable costs?
- 2 Calculate break-even: 100 divided by your margin percentage gives the minimum ROAS.
- 3 Add profit margin: For profitability, you need to exceed break-even.
- 4 Consider CLV: With high Customer Lifetime Value, you can accept a lower ROAS.
Differentiate ROAS by channel
Not every channel has the same target ROAS. Brand campaigns often achieve ROAS of 10+, because users already know you. Prospecting campaigns for new customers naturally have lower ROAS – but are essential for growth.
Never compare remarketing campaign ROAS with new customer acquisition. This distorts evaluation and leads to wrong budget decisions.
Attribution: The big question mark
In a multi-channel world, attribution is challenging. Which channel gets 'credit' for the purchase? Last-click attribution overestimates channels at the end of the customer journey, while early touchpoints are underestimated. Use data-driven attribution models for a more realistic picture.