How this number is made
Return on ad spend is revenue divided by the spend. A ROAS of 4 means four dollars of revenue per dollar of ads. It is not profit. The goods, the shipping, and the processor fee still come out.
- Revenue should be the revenue you are willing to attribute to these ads, not all revenue.
- Spend is the media cost. Include agency fees if you want the ratio to be honest.
Formula
ROAS = revenue ÷ ad spend.
Worked example
With the figures already in the form, revenue per dollar of ads is 4.00.
Questions
What ROAS is profitable?
It depends on your margin. A ROAS of 4 on a product with a 20% margin loses money. Multiply the spend by the margin and compare with the spend.
Is this ROI?
ROI subtracts the cost and divides by the cost. ROAS does not subtract the cost of goods. They answer different questions.