Return on ad spend is the revenue generated divided by the amount spent on ads. If you spend $10,000 on ads and generate $40,000 in revenue, your ROAS is 4x or 400%. ROAS is the primary metric most advertisers use to evaluate campaign performance. Higher ROAS means you’re generating more revenue per dollar spent. ROAS requirements vary by business model based on your margins and other costs. A business with 50% margins might need 3x ROAS to be profitable while a business with 80% margins might be profitable at 2x ROAS.

Why ROAS Can Be Misleading

ROAS can be misleading because platform-reported ROAS often overcounts due to attribution issues, ROAS doesn’t account for profit margins so high ROAS doesn’t necessarily mean profitability, ROAS doesn’t include non-ad costs like salaries and tools, and ROAS can look good on loss leaders if you’re not tracking full customer journey. Two campaigns with the same ROAS might have completely different profitability based on margins and customer lifetime value. This is why sophisticated businesses track ROAS alongside customer acquisition cost, profit margin, and customer lifetime value.

Setting ROAS Targets

Setting appropriate ROAS targets requires understanding your unit economics completely, calculating what ROAS you need to achieve desired profit margins, accounting for customer lifetime value not just first purchase, and setting different targets for different campaign types. Awareness campaigns might have lower ROAS. Direct conversion campaigns should have higher ROAS. The businesses with the most profitable ad accounts have clear ROAS targets for each campaign type and they’re ruthlessly cutting or optimizing anything that consistently underperforms targets.