What is ROAS? Definition, formula, and how to calculate it

ROAS — return on ad spend — is the most important metric for ecommerce advertising. It tells you how much revenue you generated for every pound or dollar spent on ads. If you spent £1,000 and generated £4,000 in revenue, your ROAS is 4× (or 400%). Here's everything you need to know about ROAS: what it means, how to calculate it, what's considered good, and how to explain it clearly to clients.

ROAS vs ROI — what's the difference?

ROAS measures the revenue generated per pound of ad spend. ROI (return on investment) measures profit — it accounts for the cost of goods, fulfilment, agency fees, and other expenses, not just ad spend. ROAS will always be higher than ROI because it doesn't account for margins.

Example: you spend £1,000 on Google Ads, generate £4,000 in revenue (4× ROAS). But if the products sold cost £2,000 to produce and deliver, your actual profit is £1,000 — a 100% ROI. ROAS looked great; actual profitability is the real story. This is why knowing a client's gross margin matters when setting ROAS targets.

What is a good ROAS?

There is no universal "good ROAS." The right ROAS depends entirely on the client's gross margin. A business with 70% margins can sustain a 2× ROAS profitably. A business with 20% margins needs 5× or higher to break even on ad spend.

The break-even ROAS formula: 1 ÷ gross margin %. A business with 25% margins needs at minimum a 4× ROAS to break even. Anything above 4× is profitable; anything below loses money on every sale.

How to explain ROAS to clients

Most clients understand ROAS intuitively once you frame it correctly. Avoid jargon and lead with the business implication.

Bad explanation

"Your ROAS this month was 4.2, up from 3.8 last month, representing a 10.5% MoM improvement in return on ad spend efficiency."

Good explanation

"For every £1 you spent on Google Ads this month, you made £4.20 back in sales — up from £3.80 last month. The ads are becoming more efficient, which means your ad budget is working harder than it was."

The principle: translate the metric into what it means for the business. Every £1 in, £4.20 out. That's the sentence every client can immediately understand and remember.

How to set a ROAS target with a new client

Before running any ecommerce ads, you need to know three numbers from the client: average order value, gross margin percentage, and what percentage of revenue they're willing to spend on advertising (their target ACOS — advertising cost of sales, which is the inverse of ROAS).

Once you have the gross margin, calculate the break-even ROAS (1 ÷ margin). Set the target ROAS above break-even to ensure the campaign is profitable. Document this in the client brief and print it in every monthly report as a comparison point. Agencies that set and track ROAS targets explicitly retain clients significantly longer than agencies that report ROAS without a target to compare against.

ROAS in monthly reports

In a monthly client report, ROAS should appear as a KPI callout — actual vs. target, with a green or red indicator showing whether the campaign is on or off target. Include the trend (up or down vs. last month) and one sentence of context. That's all it needs. Clients who understand the target and the trend don't need a paragraph of explanation.

For the full structure of how to include ROAS in a client report, see the Google Ads reporting template for agencies.