In plain words
Return on ad spend is revenue divided by the ad spend that produced it. A ROAS of 3 means three dollars of sales for every dollar of ads. Ad platforms report it by default, which is why it is the most quoted number in acquisition.
It is a ratio of revenue, and revenue is not what you keep. An offer that gives away margin to convert, with deep discounts, gifts and free shipping, raises ROAS and can lower profit. Two campaigns with the same ROAS can differ completely in what they earn if they sell different offers.
Formula
- ROAS = revenue attributed to the ads ÷ ad spend
- Margin per ad dollar = contribution margin of those orders ÷ ad spend
Worked example
$18,000.00 of ads over six months acquires coffee subscribers who, with their renewals, bring in $94,814.41 of revenue within twelve months. That is a ROAS of 5.27.
The engine puts the margin on those orders at 1.49 times the ad spend. The spend comes back, with $8,806.67 over.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
A ROAS above 1 is not a profit
Revenue of twice the ad spend sounds like a gain. If the orders keep 38% of their revenue, a ROAS of 2 returns 76 cents of margin for each dollar spent. Break-even is where margin equals spend, and that is a ROAS well above 1.
Using it
Know your break-even ROAS for each offer and judge campaigns against that. A fixed target across the whole account misleads. Be clear which revenue is counted: first orders only, or renewals too, and over how many months. Where you can, replace ROAS with margin per ad dollar, which already has the offer's costs in it.
In Offer Suite
Offer Suite's spending plan reports margin per dollar of ad spend, which counts what the orders keep, in place of a revenue ratio.
Source: Offer Suite's offer simulator.