What is ROAS

Return on ad spend – Complete Guide

What is ROAS?

ROAS stands for Return on Ad Spend. This metric measures the effectiveness of your advertising campaigns by comparing the amount invested in advertising to the revenue generated by those ads.

It is one of the most important figures in online marketing as it answers the question: How much does every euro spent on online advertising return?

A higher ROAS indicates more effective campaigns in generating sales or conversions, while a lower ROAS suggests that the investment is not yielding the desired results.

ROAS Calculation

ROAS is calculated using the formula: Conversion Value / Ad Spend. For instance, if you spend €1 on an ad and it generates €5 in revenue, your ROAS is 5 or 500% when expressed as a percentage. The higher the number, the better.

ROAS = Conversion Value ÷ Ad Spend

While ad spend is easy to obtain from the ad platform, calculating revenue requires active conversion tracking.

ROAS in Practice

ROAS is primarily used to evaluate the success of specific advertising campaigns and decide how to allocate budgets across multiple campaigns. By comparing ROAS across campaigns, you can determine which deserve higher budgets and which, due to poor performance (low ROAS), should be scaled back or stopped.

Defining an Optimal ROAS

There is no universal ideal ROAS. For instance, one business may be profitable with a ROAS of 300% (€1 spent generates €3 in revenue), while another may need a ROAS of 1000% due to low profit margins.

Each business has different goals, so your target ROAS should reflect your specific needs:

• If you focus on growth: You may set a lower ROAS to attract more customers, even if it means reduced profit.
• If profitability is the priority: A higher ROAS ensures each ad investment delivers maximum returns.

In e-commerce, a ROAS of 500–1000% is common, though deviations depend on individual business models.

Metrics Influencing Return on ad spend

Several metrics directly impact ROAS. Key ones include:

• Conversion Rate (CR): The percentage of visitors who perform a desired action (e.g., purchase). A higher CR improves ROAS.
• Cost per Click (CPC): The cost of a single ad click. Lower CPC with the same CR boosts ROAS.
• Average Order Value (AOV): The average value of orders from ad-driven traffic. Higher AOV means each customer spends more, increasing ROAS.

ROAS in Google Ads

You’ll frequently encounter ROAS in Google Ads, either as a metric for campaign performance (Conversion Value/Cost) or when selecting a bidding strategy.

Note: Sklik uses an inverse metric called PNO (percentage of revenue spent on ads).

Return on ad spend as a Bidding Strategy in Google Ads

You can set a target ROAS, and Google will automatically manage bids. However, practical challenges include:

1. Setting an overly optimistic ROAS target can significantly reduce clicks and may even pause campaigns.
2. ROAS bidding doesn’t fix fundamentally unprofitable campaigns. Poor results may stem from factors other than bidding strategy.
3. Campaigns with fewer conversions tend to struggle with automated bidding. Google’s tools often perform better for advertisers with high conversion volumes.
4. ROAS strategies may not respond quickly to performance fluctuations. By the time they adapt, the situation may have already changed.
5. ROAS bidding doesn’t allow manual adjustments to click costs or immediate visibility boosts during time-sensitive promotions.

ROAS as a Metric in Google Ads and How to Improve It

Improving ROAS is not always the ultimate goal, as better returns don’t guarantee higher sales or revenue. The ideal approach balances sales volume with return on investment.

To enhance ROAS:

• Use a high-quality product feed with minimal rejected products.
• Optimize product titles and descriptions to provide clear, detailed information for users and Google.
• Leverage audiences and signals in Performance Max campaigns.
• Continuously test and improve ads and assets.
• Monitor performance and adjust budgets or bids as needed.
• Segment campaigns based on product groups, margins, sales potential, and other factors.

Don’t Forget POAS

While ROAS is crucial, the ultimate KPI for any business is profit. POAS (Profit on Ad Spend) measures the profit earned per euro spent on advertising.

While ROAS tracks revenue, POAS goes a step further by considering actual profit after deducting all costs, including production or service costs. For many businesses, POAS is key to understanding whether advertising contributes to profitability or just boosts revenue.

POAS = Profit ÷ Ad Spend

For example, if you spend €1,000 on ads and earn a net profit of €300, your POAS is 0.3, meaning each euro invested yields €0.30 in profit.

To improve POAS, optimize ads and reduce product-related costs. Strategies include increasing AOV, reducing production or distribution costs, and targeting more profitable market segments.