What each pound of advertising brings in, and the ROAS below which the ads lose you money.
ROAS
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Enter your ad spend and the revenue it brought in. You get your return on ad spend (ROAS), as a ratio and as a percentage, and your advertising cost of sales (ACoS). Add your gross margin to see your break-even ROAS, the point below which the ads cost more than the profit they bring in. You can also start from a target ROAS to find the revenue you need or the most you can spend. Every step is shown.
'ROAS' measures a campaign from what it cost and what it brought in. 'Revenue' gives the sales a budget has to generate to meet your target ROAS. 'Max spend' gives the most you can spend for a revenue goal without falling below that target.
Turnover is measured after deducting VAT, so take VAT out of your sales if your tracking records VAT-inclusive basket values; otherwise the ROAS looks better than it is. For spend, count everything the ad platform charged, fees included, excluding VAT if you reclaim it. Use sales and spend for the same period. If several platforms each claim the same sale, their revenue figures add up to more than you actually sold: for an overall ROAS, divide your total revenue by your total ad spend.
Gross margin here is your profit as a share of the selling price excluding VAT: (selling price − cost of the product) ÷ selling price. It is not the markup, which is worked out on cost. For an accurate break-even point, also take off what each sale costs you to fulfil: delivery, payment fees and marketplace commission. Your break-even ROAS is 1 ÷ gross margin: at 40%, each pound of advertising must bring in at least £2.50 of revenue to pay for itself.
Amounts are rounded to the nearest penny, with halves rounded up. Two figures are rounded the safe way, so that the target ROAS is still met: the revenue needed is rounded up to the penny and the maximum spend down to the penny (for a £200 revenue goal at a target ROAS of 3, the maximum spend is £66.66, not £66.67). The ROAS and the break-even ROAS are rounded to two decimal places, the ROAS percentage to a whole number, and the ACoS and the ROI to two decimal places. Each line of the workings uses only figures shown in the workings, so you can check it by hand.
ROAS = revenue excl. VAT ÷ ad spend excl. VAT; as a percentage: ROAS × 100.
ACoS = ad spend ÷ revenue × 100 = 100 ÷ ROAS.
Revenue needed = ad spend × target ROAS; maximum spend = revenue goal ÷ target ROAS.
Break-even ROAS = 1 ÷ gross margin.
Profit after ad spend = revenue × gross margin − ad spend; ROI = profit after ad spend ÷ ad spend.
An online shop spends £800.00 on social media ads in a month, and the sales attributed to them come to £3,600.00, both excluding VAT. Its ROAS is £3,600.00 ÷ £800.00 = 4.5, or 450%, and its ACoS is 22.22%. At a 30% gross margin its break-even ROAS is 1 ÷ 30% = 3.33. The gross profit on those sales, £1,080.00, pays for the £800.00 of ads and leaves £280.00, an ROI of 35%. To hit a ROAS of 6 on the same budget, it would need £4,800.00 of sales.
Divide the revenue from your ads by what they cost. £3,600 of sales from £800 of ad spend is a ROAS of 4.5: each pound spent brought in £4.50. Google Ads shows the same ratio as a percentage, here 450%; its own example is a target ROAS of 500% for £5 of sales per £1 spent.
There is no figure that suits everyone: it depends on your margin. Your break-even ROAS is 1 ÷ gross margin. At a 25% margin you need a ROAS of 4 just to pay for the ads; at 60%, 1.67 is enough. Above that point the campaign adds profit; below it, the ads lose money, however high the ROAS looks.
ROAS compares revenue with ad spend. ROI compares what is left once the products and the ads are paid for. A ROAS of 4 at a 20% margin loses money: £5,000 of sales leave £1,000 of gross profit, less than the £1,250 spent on ads, an ROI of −20%.
ACoS (advertising cost of sales), which Amazon Ads uses, compares spend with revenue: ACoS = 100 ÷ ROAS. A ROAS of 2 is an ACoS of 50%, and a ROAS of 4 is an ACoS of 25%. To avoid losing money, keep your ACoS below your gross margin.
No: compare figures excluding VAT. If you're VAT-registered you can reclaim the VAT on what you buy for your business, ad spend included, so it is not a cost. If you're not registered, or you use the Flat Rate Scheme, you cannot reclaim it, so enter your spend including VAT, because that is what it costs you. On the sales side, always take the VAT out.
This calculator gives general information, not legal, tax, financial or accounting advice. The result depends on the revenue your tools attribute to the ads and on the costs you count in your margin: check them before you set a budget.
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