Return on ad spend (ROAS): how to calculate it and when your campaign is profitable
In short: return on ad spend (ROAS) = sales value from the ad ÷ ad cost. But a high ROAS doesn’t necessarily mean profit; the minimum for profit is the “break-even ROAS” = 1 ÷ your margin. If your margin is 40%, you need a ROAS above 2.5 to make money. Calculate on sales excluding VAT, and compare platform numbers with your actual sales.
“The campaign brought a ROAS of 4, so it’s excellent?” Not always. ROAS is one of the most used numbers in advertising, and one of the most misunderstood. In this article we explain how to calculate it, and how to find the number that means profit for your own business.
What is ROAS?
Google defines it as the value of the conversions you get relative to what you spend on ads:
ROAS = sales value attributed to the ad ÷ ad cost
Example: you spent SAR 2,000 and the campaign brought SAR 8,000 in sales. ROAS = 4, or 400%. Each riyal of advertising brought back 4 riyals in sales.
Why can a high ROAS lose you money?
Because the SAR 8,000 is sales, not profit. From those sales you pay for the product, shipping, payment fees and packaging. If your margin is small, a ROAS of 4 can be a loss.
Calculate your break-even ROAS
Break-even ROAS = 1 ÷ gross margin
- 50% margin → you need a ROAS above 2 to profit.
- 40% margin → above 2.5.
- 25% margin → above 4.
- 15% margin → above 6.7.
This number is the baseline for every decision: a campaign below break-even loses money, however good the number looks in the platform’s dashboard. Above it, the difference is your profit before your other fixed costs.
Watch out for VAT and returns
- VAT: if the order value sent to the platform includes VAT, ROAS looks higher than it really is. Send the value excluding VAT, or subtract it when you calculate.
- Cancelled and returned orders: the platform counts the order at the moment of purchase. If you have a rate of returns or cancellations (especially with cash on delivery), subtract it.
Platform numbers aren’t the whole truth
Each platform attributes an order to itself according to its own window: someone who saw a Snapchat ad, then clicked a Google ad, then bought, may be counted by both. So if you add up the platforms’ ROAS, you’ll find it larger than your actual sales.
The fix: alongside platform ROAS, track one simple overall number:
Marketing efficiency = total store sales ÷ total ad spend
If spend goes up and total sales don’t, the campaigns are taking credit for sales that would have happened anyway.
Target ROAS on Google
Google lets you set a “target ROAS” so it optimises bids automatically. According to Google’s help: if you want SAR 5 in sales for every riyal, you set a target of 500%. But it requires conversion values to be reported, a minimum number of conversions (15 in 30 days for Search and Shopping campaigns), and it recommends collecting four weeks of data before setting the target. Setting a very high target from the start sharply reduces your visibility.
How do you actually raise ROAS?
- Raise the average order value: bundles, a free-shipping threshold, complementary products.
- Improve the product page and checkout: the same visits bring more orders.
- Stop audiences and ads below break-even once you have enough data.
- Retarget people who visited and didn’t buy: often your highest return.
- Improve the margin itself: negotiate with suppliers, or review your pricing.
Frequently asked questions
What is a good ROAS?
There is no single number that fits everyone. A good number is any number clearly above your business’s break-even ROAS, which equals 1 ÷ your margin.
What’s the difference between ROAS and ROI?
ROAS measures sales against ad cost only. ROI measures profit after all costs against the whole investment. ROAS is quicker for daily decisions; ROI is more honest for the full picture.
Why is the platform’s ROAS higher than my sales?
Because each platform attributes the order to itself according to its own attribution window, so a single order may be counted more than once. Always compare with your actual total sales.
The bottom line
ROAS is an excellent tool if you know your break-even point, calculate without VAT, and compare with real sales. If you want a measurement dashboard that really ties your ads to your profits, have a look at our digital advertising service.
To find your campaign’s break-even point right away, try our free ROAS and break-even calculator.
