Return on ad spend (ROAS)

What is return on ad spend (ROAS)?

Return on ad spend (ROAS) calculates the revenue an advertising campaign earns compared to its cost, measuring how effective a team is with its digital advertising investments.

ROAS can reflect campaign, channel, or platform-specific results through monthly, quarterly, or annual snapshots.  

Why is ROAS important?

ROAS is a popular marketing metric that empowers teams to understand and improve their ad campaign effectiveness. 

ROAS quantifies individual campaign success and can dissect ad data by channel or platform. Ongoing ROAS measurement provides insight into which advertising channels and strategies work best, enabling teams to manage their advertising budgets more efficiently and consistently create high-performing campaigns.

By monitoring ROAS alongside other marketing success metrics, teams can gradually improve their total marketing ROI with activities across the customer journey. 

How to calculate return on ad spend

To calculate return on ad spend, divide the total advertising revenue by the total cost to run the ad. Multiply the result by 100 to get the ROAS percentage.

If an organization spends $100 on its advertising and earns $300, for example, then its ROAS is three. This means the organization earns $3 for every $1 spent on advertising. Multiply three by 100 to get 300%, the ROAS percentage. 

What data points do I need to calculate return on ad spend?

To calculate ROAS, teams need to know their advertising spend and the sales that can be traced to those advertisements. Ad platforms often contain this data, but teams may need to combine data from multiple sources if they are measuring the results of an individual campaign managed on multiple platforms (i.e. Facebook Ads and Google Ads). 

Nuanced calculations can include the total cost of the ad and a more accurate reflection of the sales driven, which is known as profit on ad spend (POAS). POAS accounts for the cost of the employees who wrote the ad copy, set up the ad, and executed it, as well as operating or manufacturing costs that detract from the total sales.  

Return on ad spend formula

ROAS = (revenue from ad/cost of ad) x 100

Challenges of calculating ROAS

ROAS is a fairly straightforward metric to measure, however, there are several common challenges when calculating ROAS or understanding it to improve the overall marketing strategy:

• Attribution modeling - Customer and buyer journeys span multiple touchpoints (if not dozens) before they make a purchase. ROAS places heavy weight on the value of the ad, which may distort the value that other content assets or touchpoints had leading up to the purchase. Additionally, if audiences are not created using first party data, it can be difficult to develop proper attribution models.

• Audience tracking - If an organization does not have robust tracking systems in place, it may be unable to verify whether someone made a purchase after viewing an ad. This is also a challenge if ads are placed on mediums that are innately difficult to track, such as TV, billboards, or radio.

• Behavior lags - Associated with audience tracking, a customer may make a purchase several hours or days after viewing an ad. ROAS will vary depending on how soon a team measures the results of a specific campaign.

• Uncontrollable factors - Many outside factors can affect consumer behavior in ways that marketing teams cannot anticipate. Global events, competitor activities, and economic factors may deter customers from making a purchase, even when presented with an optimal advertisement tailored to their needs. 

Return on ad spend use cases

ROAS is useful for any marketer or advertiser directly involved with managing ad campaigns or seeking to reach buyers on a specific marketing channel. It can also provide customer insights to other marketers, like what a specific buyer or customer persona is interested in and which topics are most attention-grabbing to them. 

Return on ad spend offers marketers valuable insights to measure and optimize their ad strategy, including:

• Campaign performance - How well did an individual campaign perform as a whole?

• Channel performance - How have ads on specific channels performed? Which channels are most worth the investment?

• Platform performance - How have ads on specific platforms performed? Compare Google Ads against Facebook and other popular ad platforms.

Each advertising platform, including Amazon Advertising, Google Ads, Facebook Ads, Instagram Ads, LinkedIn Ads, and Microsoft Advertising, provides ROAS insights. 

What type of roles typically focus on ROAS?

ROAS is most helpful for marketing and advertising teams looking to optimize their advertising efforts, including performance marketing, growth marketing, and demand gen roles. However, ROAS is also a great metric for executive leadership to understand how the team is performing. Additionally, sales teams could be interested in ROAS, given that advertisements could be an essential nudge to move a prospect to a paying customer. 

What are the pros and cons of using ROAS?

Return on ad spend is a fairly easy metric to gather and it provides real-time insights that empower teams to route their resources to the most impactful places. It is a valuable metric for any organization to track, however, it should not be the only metric followed. 

ROAS can be restrictive given its focus on spend and revenue. Additionally, many organizations will have campaign KPIs that don’t easily compare to ad spend. In these cases, the organization likely needs to assign a monetary value to the conversion they are trying to achieve. 

Lastly, ROAS does not consider the effectiveness of campaigns active in other channels (email, SMS, etc.) which can skew the true ROAS of a campaign.

Return on ad spend vs. other growth marketing metrics

ROAS can be viewed alongside other KPIs:

ROAS vs ROI

Return on investment (ROI) is a more nuanced assessment of an organization’s costs and revenues. ROI includes every cost associated with an ad implementation and the goods or services, whereas ROAS typically ignores factors like human labor costs and operational fees.

ROAS vs. CPA

Cost per acquisition (CPA) measures the cost of acquiring a customer or lead through ads. Calculate CPA by dividing the total cost of the ad campaign by the number of acquisitions it generated. CPA complements ROAS by showing how many new customers are acquired through campaigns. 

ROAS vs. CTR

Click-through rate (CTR) measures who clicked on an advertisement, which may not have resulted in a purchase. CTR could imply an ad is relevant but some other factor led the buyer to not make a purchase. Those who engage with an ad could be prime targets for a follow-up campaign while their interest is potentially higher. 

ROAS vs. CAC

Customer acquisition cost (CAC) measures the average cost of acquiring a new customer, and it reflects all marketing and sales expenses. Calculate CAC by dividing the total marketing and sales expenses for a specific period by the number of new customers acquired in that period. 

What is a good return on ad spend?

Advertisers often cite 4:1 as a good ROAS ratio, meaning the company earns $4 for every $1 spent on advertising. However, the ideal ROAS varies based on a few factors:

• Advertising goal - If the goal is to drive sales, a higher ROAS is better. If the goal is to drive brand awareness, however, a lower ROAS is expected.

• Business model - A company’s business model will affect the average customer lifetime value and expected turnover rate. Companies may have high customer acquisition needs depending on their average customer behavior.

• Industry - Some industries rely on widespread marketing efforts, whereas others target very distinct customer personas. 

A minimum ROAS threshold could be the break-even point, in which the advertising costs equal its revenues. A negative ROAS — such as if a company spends $1,000 on advertising and earns $500 — suggests an urgent need to rework the campaign. 

Average return on ad spend across industries

Ad spend benchmarks from 2022 suggest the following ROAS by industry:

• Automotive: 1.93

• Beauty and personal care: 3.01

• Clothing, shoes, and jewelry: 3.92

• Electronics: 3.93

• Sports and outdoors: 4.98

These benchmarks can vary greatly when looking at individual platforms. For example, Amazon Advertising delivered an average 4.81 ROAS in 2023.

Create a benchmark of your last annual and monthly ROAS as you begin tracking and optimizing your results. 

ROAS formula examples

Consider these examples of companies across industries calculating ROAS:

• Automotive - An auto repair shop runs an ad campaign promoting discounted brake replacements ahead of the winter season. The campaign costs $1,000 and earns $1,950. The ROAS is 1.95, or 195%. 

• Entertainment - A theme park promotes a special after-hours event and spends $5,000 in advertising. The ads attract 1,000 people and earn $30,000. The ROAS is 6, or 600%. 

• Media - A streaming service conducts a Black Friday campaign to entice new subscribers with a substantially low annual cost. The campaign costs $15,000 and attracts 30,000 new customers, earning $360,000. The ROAS is 24, or 2,400%. 

• Retail - A clothing store is launching its new seasonal collection and wants to drive immediate sales. The campaign costs $25,000 to implement and earns $120,000 in sales. The ROAS for this campaign is 4.8, or 480%.

• Telecom - An internet provider targets former subscribers ten months after deactivating. The campaign costs $1,000 to implement and earns 25 returning customers, totaling $25,000 in sales. The ROAS for this campaign is 25, or 2,500%.

How Do You Improve Your ROAS?

There are many ways to improve ROAS, starting with optimizing the audience targeting.

Organizations need a reliable, single source of truth for all customer information. That typically means storing all customer data in a data warehouse and implementing a composable customer data platform (CDP) that sits on top of the warehouse and syncs audience data to all sales and marketing tools.

The optimal martech and data stack will effectively identify customers and track their activities across channels and devices, creating a rich profile of activity and purchases. This evolving dataset provides new opportunities to further segment and refine an organization’s audiences. 

With clean data available, additional best practices for improving ROAS include:

• Set clear campaign objectives - Definite a clear goal of the campaign and use this goal to understand the minimum acceptable ROAS.

• Test ad formats and platforms - Constant testing is the only way to learn what strategies perform best with an audience. Try new ad formats and platforms to find the optimal combinations.

• Create targeted/segmented audiences - Invest in the necessary customer segmentation to ensure ads are hyper-tailored and delivered to customers with the highest likelihood of engaging with the content. Ad spend is wasted when organizations target broad audiences with generic messages.

• Optimize creative and copy - Test every ad element in isolation, including messages, keywords, and design choices. Even something seemingly small, like font choice or color, could have a big impact on the campaign results. 

• Implement conversion tracking and attribution - Adopt solutions and implement strategies to help monitor customers in their online journey and effectively track whether they make a purchase (even if that’s days or weeks after viewing an ad). 

Marketing experiments are necessary to assess the results of any marketing effort, which is the basis for the ROAS calculation. A marketing organization needs a robust experimental campaign strategy to properly evaluate the impact of each marketing test or intervention.