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How to Calculate ROAS, And the 3 Kinds You NEED to Know

How to Calculate ROAS, And the 3 Kinds You NEED to Know

Last Updated:  
March 18, 2024

Here at Triple Whale, we believe (and the data shows) there are better ways to assess channel and ecosystem health than simply calculating ROAS. We have identified 3 North Star metrics for the highest fidelity representation of a marketing ecosystem’s health.

Blended ROAS is Dead

For the longest time, the gold standard for media buying was a blended metric. Meaning you would combine all your efforts to establish your CAC or Customer Acquisition Cost.

So, if you were running multiple channels; say FB, Googs & Snap. You would add up all the total revenue from paid channels divided by all the total ad spend from all paid channels.

Blended ROAS = Total Paid Revenue / Total Ad Spend

Now, don’t get me wrong, I used to use blended, and report on blended; this was helpful when attribution had a semblance of efficacy.

However, now the variations in reporting are so large that the metrics are causing a misdiagnosis of true channel health. This leads to inefficient deployment of spend, causing even further performance degradation to the ecosystem.

The central thesis of ‘3 ROAS to Rule Them All’ is that attribution is and always will be broken. Therefore we need channel agnostic heuristics tied to a business objective to represent the health of our marketing ecosystem.

New ROAS Paradigm v Old ROAS Paradigm

At the highest level a business owner cares about three things:

Total Revenue • Net Profit • Net Margin

**Side note: Net Profit and Net Margin are essentially the same thing. Only difference is one is expressed as a percentage of total revenues (NM) and the other an absolute (NP).

Now these are fantastic metrics, but they don’t give you any insight into your paid media’s efficiency, effectiveness or profitability. As a media buyer, this is what we care about.

Efficiency, Effectiveness, Profits.

You should also care about Total Revenues, Net Profit & Net Margin; however, they aren’t high fidelity enough for you to make buying decisions off of.

With that being said, let’s look at the old growth paradigm. It is a strong framework that I still find useful, but like all frameworks it has its drawbacks.

Ecom Success = Traffic * Conversion Rate * Customer Value

**Side note: Customer value manifests in AOV or LTV.

To be fair, this growth formula isn’t technically wrong. On the other hand, if I gave you those three metrics with MoM, QoQ, and YoY deltas could you tell me:

✅Short Term Health of the Business

⛔Long Term Health of the Business

⛔Profitability of the Business

You could definitely derive the short-term health of the business from the old growth formula, but would you know how efficient your paid media is? How profitable?

What about if you want to know the composition of the traffic; is it just a bunch of super fans coming back; traffic from a bot farm in Russia or actual new customers?

That is the exact impetus for us developing a new way to look at the health of a marketing ecosystem. On top of that, these metrics combined with the OG metrics mentioned above (Total Revs, Net Profit & Net Margin) provide an accurate and comprehensive representation of a business’s health.

After going through inordinate amounts of data from a kaleidoscope of Shopify stores and millions of dollars of ad spend, we have identified a new growth formula:

Ecom Success = ncROAS * eROAS * POAS

Below we go into the details of new customer ROAS (ncROAS), ecosystem ROAS (eROAS) and profit on ad spend (POAS).

Let’s get started!

Get deeper insight into ROAS and other critical performance metrics with Triple Whale.

eROAS - Ecosystem ROAS

eROAS = Total Revenue/Total Ad Spend

Ecosystem ROAS or eROAS is a an indicator of how effective your marketing ecosystem is. eROAS is a great metric to buy off of and pace from. For example: a client might say they need a 3.5 ROAS to break even on Facebook and a 5 ROAS on Google.

That’s great, but that is predicated on the fact that channel attribution is 1) Reliable 2) Accurate. Both of which are incredibly flimsy assumptions to base all of your paid media deployment on.

Now, with eROAS you can go to the the accountant/CFO or whoever and say: “how much money can I spend at X revenue?”

Making the math easy, let’s say they come back with: “you can spend up to $100k a month with a minimum of $500k in revenue.”

Perf, now we know our eROAS target.

eROAS = Total Rev/Total Ad Spend = 500k/100k = 5

From eROAS, you can derive an optimal pacing strategy for your spend. In this example, whenever your eROAS is below 5 you are overspent; above 5 you are underspent.

Now you can confidently tell your client to spend more or less based on eROAS because it is tied to a business objective, in this case increase of total revenues, measured by…well, revenues. Thus, why we use it as a measure of effectiveness of the marketing ecosystem.

TL;DR Ecosystem ROAS is a channel agnostic heuristic to understand the effectiveness of your marketing efforts on revenue.

**Side Note: Some people refer to this as MER - Marketing Efficiency Ratio. I don’t necessarily hate the name, but found when explaining the same concept using eROAS, clients were way more receptive to the idea of a new “ROAS”.

ncROAS - New Customer ROAS

ncROAS = Total New Customer Revenue/Total Ad Spend

ncROAS or New Customer ROAS is an indicator on how efficient your marketing ecosystem is at generating accretive revenue, as opposed to reactivating returning customers.

Everyone talks about their customer split i.e. we had 60% of returning customers and 40% of new customers.

A 60/40 is an ideal split, but it’s not about a new and returning customer percentage split, as much it’s about how much that new customer and returning customer spent in relation to how much was spent to convert them.

Ultimately, the majority of your paid media budget should be spent on prospecting and bringing new blood into the fold.

ncROAS is a canary in the coal mine for long run business health. If this metric starts to degrade or drop below 1, you know that you are losing money on the first customer activation for that period.

If you are only looking at eROAS or POAS and you are successfully activating returning customers, those metrics would look healthy.

However, the long term success of the business would be in peril because of the lack of accretive revenue being generated by ads.

Another way to say this is: you are showing ads to people who are already going to convert; meaning inefficient deployment of spend.

TL;DR ncROAS is the harbinger for what’s to come in the next cycle of the business. It helps measure the efficiency of your marketing ecosystem. If this metric degrades you will have severe long term headwinds, but might enjoy short term success.

POAS - Profit on Ad Spend

Profit on Ad Spend or POAS is an indicator of profits generated by the current marketing efforts. This is ultimately the contribution margin, but CMOAS doesn’t really roll off the tongue.

On the other hand, contribution margin is a measure of profit. Hence, we don’t feel that guilty calling it POAS :)

POAS = Gross Profit/Total Ad Spend

We use Gross Profit because Operating Profit & Net Profit have line items that the media buyer can rarely impact. With that being said, the business could be wildly inefficient at the operating level.

In that case, the operating inefficiency would not show up in Gross Profit or POAS. Therefore, you should always track Net Profit and Net Margin to ensure you aren’t losing all your Gross Profit at other levels on the P/L.

On the other hand, if the business is simple enough or you have a partnership style relationship where you are “consulting”, you can ratchet all the way down to net profit and run POAS with the numerator being Net Profit. This allows you to derive X amount of Ad spend is driving Y amount of net profit.

Don’t be afraid to ride the lightning ⚡!

TL;DR POAS is a high fidelity proxy for how profitable your ad spend is. POAS provides the answer to the question: Are you putting spend behind the right products or services?

Not Every Dollar is Created Equal

Alright now let’s go through some data to show you what true pain looks like when you buy off the wrong metrics. Below is data from a ~$1mm a year run rate store on Shopify.

First, let’s look at this business through the lens of the old growth formula of Traffic * CVR * Customer Value.

Get deeper insight into ROAS and other critical performance metrics with Triple Whale.

Old ROAS Growth Formula

✅ Traffic +30 YoY (very nice)

✅ CVR + 5% YoY (strong)

👌🏼[Not shown] AOV was -6% YOY and LTV was -5% YOY. (Not horrible, not great, but definitely not red alert territory)

If looking at this business through the old growth paradigm, it is in a decent spot; when you look at the blended data (not shown) it looks fantastic.

Revenue for the biz had healthy growth of +29% YoY. Sweet!

Ad spend down -12% YoY. Nice.

What were the net profits? $-28k. Brutal.

What was happening? People chose the wrong metrics to represent the health of the business. Therefore, the spend kept coming.

Said a different way: how many $20 bills can you sell for $10?

To exacerbate the issue, the business was being charged on percent of spend, which further reduced net profits by increasing the operational expenses.

**Sidenote: This isn’t a judgement on % of spend. Totally legit biz model.

In addition, all the spend was behind the lowest margin products.

To put it another way: they became really good at getting people to buy the least profitable products and scaled that.

This is not the path.

Essentially, that is what will happen if you don’t track your POAS. You will be printing money, only to realize at the end of the year you sold $1MM in product, but lost almost $30k?!

Nov20 is when Paid Media was POAS Optimized

Nov20 is when Paid Media was POAS Optimized

Once POAS was introduced as the North Star Metric, profitability exploded. The business started printing money, even at lower levels of revenue because the business’s health was being evaluated using eROAS, POAS, ncROAS, Total Revs, Net Margin and Net Profit; rather than Traffic, Customer Value, Conversion Rate and Total Revs.

Get deeper insight into ROAS and other critical performance metrics with Triple Whale.

Understanding The 3 Types of ROAS

Understanding what metrics give the most accurate representation of your ecosystem’s health is what will set you apart as a media buyer.

The highest fidelity indicators for a marketing ecosystem’s health are:

♻️ eROAS - Short term health of the business. How effective is my paid media?

🆕 ncROAS - Long term health of the business. How efficient is my paid media? Am I bringing in new people or just reactivating past customers?

💰POAS - Profitability of the marketing ecosystem. Am I promoting the right products/services to drive profits?

The highest fidelity indicators for business’s health are:

Total Revenues & Net Profit & Net Margin

In summary, you should be tracking all six of these metrics to ensure you aren’t just looking at the health of the marketing ecosystem, but rather the business health, as a whole.

“Ok I am in. Now what? Do I need a plugin or app or something?”

Nope. Not to worry Triple Whale has you covered.

All three, eROAS, ncROAS & POAS are being built in Triple Whale as we speak; soon you will be able to just add them to your dashboard and start printing money.

If you want to get 15% off Triple Whale, try this link.

Here is what my daily driver dashboard looks like:

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