ROAS stands for Return on Ad Spend and is the best-known advertising metric in retail: revenue divided by advertising costs. A ROAS of 4 means that every euro spent brought in four euros of revenue.
How to calculate ROAS
ROAS = revenue attributed to the ads ÷ advertising costs
Example: a campaign costs EUR 150 and the advertising platform attributes EUR 1,000 of revenue to it. The ROAS is 1,000 ÷ 150 = 6.7. Which revenue the platform attributes is up to the platform: only purchases of the advertised item, or other items after the click as well, with or without VAT. So compare ROAS values only when they are on the same basis.
What does ROAS tell you, and what does it not?
ROAS measures revenue, not earnings. It knows nothing about commissions, purchase prices, shipping or returns. That is why a campaign with an impressive ROAS can lose money if the margin of the advertised item is thin, and a campaign with an unremarkable ROAS can pay its way if the item earns well.
What is the break-even ROAS?
The break-even ROAS is the value at which the advertising costs use up exactly the contribution margin of the attributed sales. If the actual ROAS is below it, the ad costs more than the sales bring in. It can only be determined per item, because it depends on the item's contribution margin.
Break-even ROAS = 1 ÷ contribution margin ratio before advertising
= selling price ÷ contribution margin before advertising
= 100 ÷ break-even ACOS in percent
The ratio here refers to the same revenue the platform uses to calculate the ROAS, i.e. gross or net.
Example with the figures from the contribution margin entry: an item sold for EUR 59.50 gross yields EUR 16.57 of contribution margin before advertising without returns. Relative to the gross price, that is a ratio of 16.57 ÷ 59.50 = 27.8%. The break-even ROAS is 59.50 ÷ 16.57 = 3.59. That matches the break-even ACOS of 27.8% from the same example.
The basis makes a noticeable difference. In the contribution margin entry, the ratio refers to net revenue, where it is 16.57 ÷ 50.00 = 33.1%. If a platform calculates the ROAS with net revenue, the threshold is 50.00 ÷ 16.57 = 3.02. It is the same item, just without VAT in the revenue: 3.59 ÷ 1.19 = 3.02.
Returns raise the threshold. If only EUR 10.96 of contribution margin per order remains after returns in the month, and the attributed revenue also includes orders that come back later, the break-even ROAS rises to 59.50 ÷ 10.96 = 5.43. A ROAS of 5 looks fine next to 3.59, but in this case it costs money.
As a rule of thumb: the lower the contribution margin, the higher the ROAS has to be. Without knowing your own contribution margin, the question "is a ROAS of 5 good?" cannot be answered.
ROAS, ACOS and TACOS
- ROAS: attributed revenue divided by advertising costs; the higher, the better.
- ACOS: advertising costs divided by the attributed revenue, i.e. the reciprocal; the lower, the better. A ROAS of 4 corresponds to an ACOS of 25%.
- TACOS: advertising costs in relation to total revenue, not just the attributed revenue. Shows the dependence on advertising.
Advertising costs inside the contribution margin, not beside it
profitkonsole books advertising costs into the result of each channel. That puts the figure that counts next to the ROAS: what is left after the ad.
Worked through for OTTO Sponsored Product Ads: Checking advertising costs against the contribution margin →
Contribution margin, not revenue
Every sales channel in one dashboard: marketplace data and your own costs brought together, per item and per channel.