ROAS: how to evaluate the effectiveness of your advertising

Online promotion has become an important part of business for most companies. It helps to attract customers, sell goods, and scale profits. But to understand whether your ads are really working, you need to analyze the results. One of the most common ways is to analyze the ROAS metric.

In this article, we’ll analyze what ROAS is, why it’s needed, what formula to use to calculate it, and how to use it to evaluate the effectiveness of your advertising campaign and improve its results.

What is ROAS and how to calculate it?

ROAS (Return on Advertising Spend) is a formula that shows the ratio of advertising revenue to advertising costs. In marketing strategies, this metric is often used as the main KPI to measure the success of PPC campaigns and ecommerce projects.

When users click on a paid ad, they go to the website and make a purchase or leave a request – this is revenue. All transactions and leads that result from these actions are accounted for as revenue. On the other hand, promotion costs are the amount that a business transfers to platforms like Google Ads or Facebook Ads, as well as funds for banners, videos, or other formats. It is this funding that forms the advertising budget, which is compared to the revenue generated to understand how much money is being returned.

There is a clear formula for calculating ROAS:

Let’s consider the calculation of the formula on an example. Let’s say an online home improvement store decided to test PPC promotion on Google Ads and allocated 20,000 UAH for it. The first two weeks were spent setting up: selecting keywords, creating three ad variants, and testing different bids. In the end, the ad brought 2,500 clicks to the site.

Of these visitors, 5% made a purchase, which is 125 orders. The average check was 800 UAH, which means that the total revenue from this campaign is 125 × 800 UAH = 100,000 UAH.

Now let’s compare the revenue to expenses using the formula:

This means that for every hryvnia spent, the store received 5 UAH. In percentage terms, it is 500%: if you spent 100 UAH, you got back 500 UAH.

Such ROAS indicates a successful campaign: even taking into account additional operational costs (logistics, order processing), investments in PPC are quickly justified. At the same time, it is important not to stop there – to analyze which ads brought the highest ROAS and gradually scale the budget to get even more profit.

The main factors that influence ROAS

At first glance, the ROAS formula is very simple. But this formula is only a starting point: in reality, dozens of factors affect the metric, which can both improve and significantly reduce the effectiveness of promotion. Let’s look at the key ones below.

Ad quality

Creatives are the first thing a potential customer sees. Whether the headline, visuals, and text are attractive, relevant, and understandable directly affects whether the user will be interested, click on the ad, and ultimately make a purchase. High-quality ads with a clear message and a call to action increase CTR, reduce the cost per click, and, as a result, strengthen campaign KPIs.

Cost per click (CPC)

ROAS is closely related to the bids in PPC campaigns. But a high CPC does not guarantee high results. On the contrary, too aggressive a bid increase can quickly «eat up» the budget without increasing the number of quality conversions. Optimizing bids in accordance with KPIs and the real value of traffic allows you to keep costs under control and ensure stable profitability.

Target audience

Even the best PPC ad will not work if it is seen by the wrong user. Accurate audience segmentation is the key to high ROAS. The more accurately ads are targeted to people who already have a need for the product or are ready to buy, the higher the conversion and launch efficiency. It is important to consider demographics, behavioral patterns, funnel stage, and previous user actions.

Landing page

An ad click is only half the battle. The user must be taken to a page that loads quickly, has a clear title, description, a lucrative offer, and a convenient action button. If the page is not adapted for mobile devices, loads slowly, or looks outdated, the user will leave it before taking an action, and the click will not bring any results. This reduces ROAS.

Seasonality and trends

The demand for most goods and services in e-commerce, B2B, and B2C varies depending on the season. For example, before holidays or during discount periods, e-commerce shows a significant increase in sales, which affects ROAS. On the contrary, in the off-season, even with the same expenses, revenue may fall. Trends in consumer behavior, crises, or new technologies can also dramatically change the effectiveness of launches. Successful marketers analyze these cycles and adjust their promotion strategies accordingly.

Is ROAS really an effective indicator?

ROAS is often called the simplest marker of digital success. It instantly shows whether your ads are working. However, this bright figure can hide nuances that should be taken into account to avoid getting a false picture of the real return on promotion. In a nutshell:

So, ROAS is distinguished by its simplicity: even without complex financial models, it gives a clear answer to the question of the profitability of activity. This quick assessment helps you not to waste time and resources: you can immediately abandon unprofitable channels, redirect your budget to ads that give better results, or vice versa – boldly increase spending where ROAS shows a high return on investment. The indicator works equally well for both small businesses and large ecommerce platforms, making it a universal tool for marketers.

At the same time, ROAS has its limitations. First, it takes into account only direct revenue, ignoring operating expenses such as logistics, customer service, or packaging. Secondly, customers sometimes return for a product or service weeks after the first click, so a short-term report will not reflect the full real return. Multichannel can also «dilute» the figure: Google Ads arouses interest, and conversion occurs in email or remarketing. In addition, too high ROAS often indicates a limited audience or an underestimated budget, and there is a risk of not scaling the campaign.

To avoid jumping to conclusions, you should use an appropriate attribution model, compare ROAS with CAC, LTV, and ROMI, and periodically delve into detailed reports. This approach will help you not only track short-term performance but also strategize long-term investments in promotion. So let’s take a closer look at these metrics.

ROAS and other metrics: what is important not to confuse

It’s easy to get confused among dozens of abbreviations in a marketer’s daily work: ROAS, ROMI, ROI, eCPA, CTR – they all have to do with the effectiveness of advertising, but they measure completely different things. Before you automatically equate, for example, CTR with ROAS, you should understand that each metric uses its own formula and serves its own KPI.

We’ve already discussed ROAS (Return on Advertising Spend) above. Let’s consider other metrics.

• ROMI (Return on Marketing Investment) covers a wider range of costs: team salaries, content production, analytics, CRM, etc. ROMI analyzes the return on all marketing activities, not just PPC or other channels, and is better suited for strategic analysis.
• ROI (Return on Investment) is an even broader concept that is calculated for the entire business. ROI includes all investments and all revenues, including operating expenses, production, delivery, and other items. It is a financial metric that is commonly used by managers to assess the profitability of a business or project in general.
• eCPA (effective Cost Per Action) – shows how much one conversion (for example, a purchase or an application) actually costs. It’s not about revenue, as in ROAS, but about the cost of achieving the target action. eCPA helps to control the budget in ecommerce funnels or other segments.
• CTR (Click-Through Rate) is the percentage of users who clicked on an ad after viewing it. It demonstrates the attractiveness of creatives, but does not take into account whether purchases have been made. A high CTR may not generate sales, while a low CTR may bring in revenue if the ads are targeted correctly.

What is considered a good ROAS?

There is no universal answer to this question – a «good» ROAS depends on many factors: the type of business, product margin, campaign goals, and even the specifics of the niche. Nevertheless, there are approximate values that you should rely on.

On average, a ROAS of 3 to 4 is considered acceptable. This means that for every hryvnia spent, this PPC activity generates 3 to 4 hryvnia of revenue. In this case, the campaign usually covers not only the cost of attracting customers but also other related business expenses (logistics, salaries, rent, etc.).

For a high-margin business, even a ROAS of 2-2.5 is enough, because the margin covers all expenses and leaves a profit. For example, for e-commerce projects selling digital products or online courses with low costs, this can be beneficial. However, in businesses with low margins (for example, retail or hardware sales), ROAS should be higher – 5 or more, otherwise the launch will break even or even lose money.

Besides, it is important to take into account the funnel stage. At the stage of getting to know the brand, ROAS may be lower – PPC activity works for recognition. And at the remarketing or sales stage, a higher rate is expected, which directly correlates with the KPIs of the promotion department.

Generalized benchmarks are useful as a starting point, but to make the assessment truly business-oriented, you should set your own target ROAS.

What is the target ROAS for advertising?

The target ROAS is the minimum ROAS level at which a campaign breaks even and starts to generate real profit. Businesses form this indicator by taking into account not only direct advertising costs but also all operating and marketing expenses.

To calculate your target ROAS, you need to weigh

• product margin: how much the business earns from each sale after covering the cost of production
• operational costs: logistics, storage, order processing, customer support
• other promotion costs: design, email newsletters, SEO, SMM;
• strategic goals: whether it is more important to increase revenue or maintain profitability.

Let’s consider an example to better understand the calculation process. Let’s imagine a company that sells small electronics with an average margin of 10%. The cost of goods is 100 UAH, and the selling price is 110 UAH. In addition to the advertising budget, each order costs another UAH 10 to process and deliver. What do we have?

1. Net profit per unit:

At first glance, every sale is a «zero».

2. To cover operating expenses, an additional buffer is needed. Let’s assume that the business wants to earn at least 10 UAH of net profit from each order. Then the real margin should be 20 UAH per unit.
3. The target ROAS is also calculated using the formula:

• investment in promotion: 100 UAH;
• minimum income to get 20 UAH of profit: 120 UAH.

Or 120% is the minimum that guarantees to cover all expenses and bring at least a small profit.

This calculation helps to plan the budget more accurately and set realistic KPIs. Without a target ROAS, launches with low-margin products risk breaking even or even losing money, even though they seem successful at first glance.

Features of ROAS calculation for B2B

ROAS calculation in B2B has its own peculiarities that distinguish it from similar metrics in B2C or ecommerce. This is due to the complexity of sales, a longer decision-making cycle, and a large number of intermediate steps.

1. In B2B, companies often work with large contracts and high transaction values. Therefore, the ROI of such activity may not be immediately apparent, but in a few months or even years. This makes it difficult to quickly calculate ROAS and requires a longer period to evaluate the results.
2. B2B sales often involve a multi-stage process, including lead generation, presentations, and contract signing. Not all user actions, such as a click or a request, immediately translate into revenue. Therefore, to accurately calculate ROAS, you need to set up end-to-end analytics that track the path of a lead to a transaction.
3. When promoting B2B, online and offline activities are often combined – exhibitions, negotiations, calls. The cost of such activities should also be taken into account in the expenses so that ROAS reflects the real payback of the promotion.
4. Due to the complexity of B2B transactions, ROAS is often calculated not based on the revenue from a specific PPC campaign, but on the Cost per Lead indicator combined with the conversion to sales.

ROAS example for B2B

In three months, a company that sells enterprise solutions spent 40,000 UAH on LinkedIn Ads promotion. This brought 1,200 clicks to the product page, of which 100 warm leads were generated. After a series of demos, negotiations, and approvals, only five of these leads turned into contracts worth 60,000 UAH each.

The total revenue from the launch was 5 × 60,000 UAH = 300,000 UAH. Let’s use the formula.

This means that every hryvnia spent on promotion brought 7.5 hryvnias in revenue. Even taking into account the costs of exhibitions, meetings, and CRM support, this strategy proved to be extremely effective.

How to improve ROAS?

Increasing ROAS is a systematic work on all stages of an advertising campaign: from budget planning to process automation. Here are some tips to make your investments as profitable as possible.

Conclusion

ROAS is a key indicator that helps you understand how effective advertising is in terms of revenue. Regular ROAS calculation allows you to control costs, evaluate the effectiveness of campaigns, and make informed decisions for business development. Without this indicator, it is difficult to understand whether the promotion is really profitable or just consumes the budget. ROAS tracking allows you to optimize marketing, increase ROI, and confidently scale your business.

Vitalyi Kotov

Head of PPC department

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