What Is ROAS (Return on Ad Spend)?
ROAS is the revenue generated per pound spent on advertising. The headline metric for any paid marketing channel.
Key Takeaways
- ROAS = Revenue Attributed to Ads ÷ Ad Spend.
- Break-even ROAS = 1 ÷ Gross Margin — not the same for every business.
- Target ROAS should be set above break-even to generate actual profit from ad spend.
The formula
ROAS is total revenue attributed to advertising divided by total advertising spend. A ROAS of 5 means £5 of revenue for every £1 spent. This is often expressed as a multiplier (5x) rather than a percentage (500%) but both convey the same thing. It is the primary efficiency metric for paid marketing channels.
Break-even ROAS
A common mistake is treating a high ROAS as automatically profitable. ROAS is a revenue metric, not a profit metric. If your gross margin is 40%, you need a ROAS of 2.5 just to cover the cost of goods on the products sold — never mind overheads. Break-even ROAS = 1 ÷ Gross Margin. Set your target ROAS above this, with enough margin contribution to cover overheads and generate profit.
Platform ROAS vs true ROAS
Ad platforms report ROAS based on their own attribution — typically last-click or their proprietary model. This almost always overstates true ROAS, because it takes credit for sales that would have happened organically. True ROAS can be measured through incrementality tests: running ads to some customers but not others (a holdout group) and measuring the difference in conversion rates. The incremental uplift is the true contribution of the ads.
When to use target ROAS bidding
Most ad platforms offer target ROAS bidding — the algorithm adjusts bids to achieve your ROAS target. Set targets based on your break-even calculation, not arbitrary numbers. If you set target ROAS too high, the algorithm will throttle spend to only the safest bids, reducing volume. Too low, and spend grows but at unprofitable rates. Test incrementally.