ROAS is the one of the single biggest indicators of health for ecommerce advertisers. Use our free ROAS calculator below to calculate your return on ad spend, then see how your ROAS compares to peers in your vertical.
How to interpret ROAS
The ROAS formula is a simple yet manually laborious formula.
ROAS = return on ad spend. To calculate using the ROAS formula, divide the dollars of total ad revenue by that campaign’s cost.
The ROAS metric is a great tool for getting a read on the performance of a specific advertising campaign such as a Google ads campaign to help maximize total ad spend. It's also frequently used as the north star for ad budget planning and eCommerce strategy. And while it's often incorrectly used as the sole indicator of most business health and performance, it's still a great proxy for understanding which ad campaigns are working for you (and which ones aren't).
Think of it like this: your business is an ecosystem, kind of like your own body. And like any ecosystem, your physical health is affected by multiple factors that occur both inside and outside your body.
ROAS calculation is the equivalent of a simple data reading, like taking your temperature or checking your blood pressure. A reading like this can provide valuable information about a specific body system, within the context of a specific time period.
Simply put, ROAS monitors the average performance and returns on your ad campaign. With it, you can make valuable decisions across your digital marketing platforms.
What's a "good" ROAS
For some businesses, a ratio of 4:1, or 4X ROAS, is brilliant or a good return on ad spend. For others, it might indicate a failing campaign.
There are a few factors to consider when determining what a good ROAS is. For instance:
Most companies aim to achieve a ROAS of 4x. Data shows, however, that the average ROAS across ecommerce is around 2X. Which, after including other business and marketing costs, may not even be enough to cover your bottom line. While startups may need a higher ROAS to cover costs and achieve financial growth, established companies can survive and even scale on lower averages.
You can start to see how a variety of factors can influence whether your ROAS is in fact "good." For a more clear indicator, use the tool above to measure your overall ROAS against competitors in your niche.
Going beyond ROAS
Variations in reporting are so large today that metrics like ROAS are causing a misdiagnosis of true channel health. This leads to the inefficient deployment of ad spend, causing even further performance degradation to the digital marketing ecosystem. ROAS is important, but if it is the only key metric you calculate, the results will be misleading.
ROAS only takes into account obvious advertising costs and how much revenue you generated, but there are a ton of other expenses that a business incurs (things like shipping, storage, production & maintenance, and manpower). You need to optimize every area of your business to make a profit, which is why it's vital to calculate ROAS alongside other metrics like CPC, CTR, AOV, MER, and LTV.
Let's take CAC and MER, specifically.
CAC = cost to acquire a customer. This is all the money spent on acquisition marketing during a period divided by the number of customers acquired in the same period.
You can compare this to your average order value and average contribution margin per order over the same period to gauge profitability in real time.
MER = media efficiency ratio. This is all your sales in a period divided by your total marketing spend for the same period. You can use this key metric to understand if, in general, your total advertising budget or ad spend is becoming more or less effective over time.
To calculate ROAS in real time, and to get a complete picture of the growth of your ecommerce business, take a spin through Triple Whale.
Then simply enter details into our free ROAS calculator to unlock the insights you need optimize your marketing efforts.
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