MSM FULL-FUNNEL CONVERSION GLOSSARY
What is ROAS?
ROAS, or return on ad spend, is the revenue generated by an advertising campaign divided by what that campaign cost, expressed as a ratio.
THE SHORT ANSWER
The Definition
ROAS, or return on ad spend, is the revenue generated by an advertising campaign divided by what that campaign cost, expressed as a ratio.
Why It Matters Commercially
ROAS decides where advertising budget goes, so getting it wrong is expensive in both directions. Businesses cut campaigns that were working because the measurement window was too short, and keep campaigns that lose money because nobody calculated the break even figure.
How It's Measured
ROAS = Revenue attributed to a campaign ÷ Cost of that campaign. A result of 4 means four pounds of revenue for every pound spent. Break even ROAS = 1 ÷ your gross margin, so a business on 25% margin needs a ROAS of 4 just to cover costs.
Who Owns It
Marketing owns the campaigns. Finance owns the margin figure that makes ROAS meaningful. Somebody needs to hold both, which in most SMEs is the commercial director or the founder, because the two halves rarely meet otherwise.
HOW IT WORKS
ROAS stands for return on ad spend. It divides the revenue attributed to advertising by what that advertising cost. Spend two thousand pounds, generate eight thousand in revenue, and your ROAS is 4.
The number on its own means nothing without two other pieces of information.
- Your gross margin. A ROAS of 4 is excellent on 70% margins and loss making on 20%. Break even ROAS is 1 divided by your gross margin, so know that figure before judging any campaign.
- Your sales cycle. In B2B, revenue often lands months after the click that produced it. A campaign judged at 30 days can look like a failure and turn out fine at 120.
Where ROAS misleads B2B businesses
ROAS was designed for ecommerce, where someone clicks an advert and buys within the same session. Attribution is straightforward and the timeline is short.
B2B rarely works like that. A buyer might find you through an advert, read three articles over six weeks, ask a colleague, then arrive directly and enquire. Most attribution models credit that last direct visit, so the advert that started the process shows a ROAS of zero.
This is why businesses cut campaigns that were working. The measurement window is too short and the model gives credit to the wrong touchpoint. If your sales cycle runs longer than your attribution window, your ROAS figures are describing something other than reality.
ROAS versus ROI
ROAS measures revenue against advertising cost only. ROI measures profit against total cost, including the ad spend, the agency fee, the software and the staff time.
A campaign can show a strong ROAS and a negative ROI once everything else is counted. ROAS is a campaign management metric, useful for deciding which advert to run. ROI is a business metric, useful for deciding whether to advertise at all.
ROAS versus cost per acquisition
Cost per acquisition tells you what it cost to win a customer. ROAS tells you what that customer was worth against the spend. Businesses with variable order values need both, because a low cost per acquisition on customers who spend very little is not a good outcome.
If your advertising figures don't reconcile with your revenue, the cause is usually measurement rather than the campaigns. Our full funnel audit traces the whole path rather than the last click.
WHAT THIS LOOKS LIKE IN PRACTICE
A firm on 30% gross margin runs a campaign returning a ROAS of 3. On the surface that reads as three pounds back for every one spent, which sounds healthy.
Their break even ROAS is 1 divided by 0.3, which is 3.33. At a ROAS of 3 the campaign is losing money on every sale before any other cost is counted.
Nobody had worked out the break even figure, so the campaign ran for months on the assumption that anything above 1 was profitable.
IS THIS COSTING YOU REVENUE RIGHT NOW?
Check these before your next budget decision:
- Do you know your break even ROAS, calculated from your actual gross margin?
- Is your attribution window longer than your average sales cycle?
- Do you know which attribution model your advertising platform is using?
- Do the revenue figures in your ad platform reconcile with your accounts?
- Are you tracking offline conversions, or only what happens on the website?
- Has anyone checked whether a paused campaign changed total enquiries, not just its own figures?
Two or more no answers means your ROAS numbers aren't reliable enough to spend against.
SEE WHAT YOUR COMPETITORS ARE DOING THAT YOU AREN'T
We'll analyse two of your competitors against your own site and show you where they're winning conversions you should be getting.
WHAT WE SEE IN THE FIELD
Plenty of businesses judge advertising on ROAS without knowing their break even figure, which means they can't tell a good campaign from a bad one. The first question worth answering isn't what your ROAS is. It's what your ROAS needs to be.
The second is whether your attribution window is longer than your sales cycle. If it isn't, you're making budget decisions on incomplete data and cutting the campaigns that feed everything else.
Reviewed by Ian Wilson, MSM.
Frequently Asked
What is a good ROAS?
It depends entirely on your gross margin. Break even ROAS is 1 divided by your margin, so a business on 50% margin breaks even at 2, and a business on 20% margin needs 5 just to cover costs. A ROAS of 4 is excellent in the first case and loss making in the second. Work out your break even figure before judging any campaign.
What does a ROAS of 4 mean?
Four pounds of revenue for every pound spent on advertising. Whether that's good depends on your margin. On 30% margin your break even is 3.33, so a ROAS of 4 is modestly profitable. On 20% margin your break even is 5, so a ROAS of 4 is losing you money on every sale.
How is ROAS calculated?
Revenue attributed to a campaign divided by the cost of that campaign. Spend two thousand pounds, generate eight thousand in revenue, and your ROAS is 4. The complication is the word attributed, because which touchpoint gets credit depends entirely on your attribution model.
What is the difference between ROAS and ROI?
ROAS measures revenue against advertising cost only. ROI measures profit against total cost, including the ad spend, the agency fee, the software and the staff time. A campaign can show a strong ROAS and a negative ROI once everything else is counted. ROAS helps you decide which advert to run. ROI helps you decide whether to advertise at all.
Why does ROAS mislead in B2B?
ROAS was designed for ecommerce, where someone clicks an advert and buys in the same session. B2B buyers take months, use several touchpoints and often arrive directly at the end. Most attribution models credit that last direct visit, so the advert that started the process shows a ROAS of zero. If your sales cycle is longer than your attribution window, your ROAS figures are describing something other than reality.
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