The ROAS formulas
Return on ad spend shows how much revenue each unit of advertising brings back. The calculator also uses your gross margin to show whether that revenue turns into profit:
- ROAS = revenue from ads / ad spend
- Break-even ROAS = 1 / gross margin
- Profit after ad spend = revenue x gross margin - ad spend
A worked example
An online store spends $1,000 on ads in a month. The ads are credited with $4,000 in sales, so ROAS is 4x. The products carry a 40% gross margin, so the $4,000 in sales leaves $1,600 of gross profit. Take away the $1,000 ad bill and the campaign made $600.
Break-even ROAS at a 40% margin is 1 / 0.4, which is 2.5x. Any week the ads return less than 2.5x, they lose money even though they still bring in sales.
Why break-even ROAS matters more than a benchmark
People often quote 4x as a good ROAS. That figure means little without your margin. A shop selling electronics on a 15% margin needs a ROAS near 6.7x just to break even. A course creator on a 90% margin is in profit at 1.2x. Work out your own break-even number first and judge every campaign against it.
Things that distort ROAS
- Attribution. Ad platforms tend to claim sales that would have happened anyway, such as people who already knew your brand.
- Returns and refunds. Revenue in the ad dashboard is usually before returns.
- Repeat buyers. A first order at a loss can still pay off if customers come back. Use the LTV calculator to see how much a customer is worth over time.
