ROAS

What is ROAS?

ROAS (return on ad spend, also return on advertising spend; in German roughly Umsatz je Werbe-Euro) shows how much revenue a company generates with each euro spent on paid advertising. This means, for example, ads in search engines, social networks or on marketplaces. If a flower shop spends EUR 100 on an advert in the local newspaper and subsequently sells additional bouquets for EUR 400, the ROAS is 4, expressed as a percentage 400%. The figure alone does not say whether the advert was worthwhile, because revenue is not profit. Out of the EUR 400, the flowers purchased, the paper and all other costs still have to be paid.

The metric is common in the online marketing of consumer brands and online retailers, above all at companies that sell directly to end customers (direct to consumer, DTC). The advertising platforms report it themselves. Investors look at ROAS together with the cost of acquiring customers (customer acquisition cost, CAC) and the repurchase rate. In the detailed review before an investment or a purchase (due diligence), the reviewers reconcile it with the shop system and the accounts.

Calculating ROAS: formula and break-even point

Formula: ROAS = attributed revenue divided by advertising costs

ROAS becomes meaningful only in comparison with the break-even ROAS, the value from which the advertised sales just earn back their advertising costs. The yardstick for this is the margin after variable costs, that is, the share of net revenue that remains after cost of goods, shipping, payment fees and return costs. This figure corresponds to the contribution margin before advertising costs.

Formula: Break-even ROAS = 1 divided by margin after variable costs

If the margin is 40%, the break-even ROAS is 2.5. At any lower value, the advertising costs more than the first order brings in. Fixed costs such as rent and salaries are not yet taken into account in this threshold. It should not be confused with the break-even point of the whole company.

Gross or net revenue

Advertising platforms often report the order value including value added tax and before returns and cancellations. For an economic statement, net revenue is decisive: without value added tax, which in Germany is normally 19%, after discounts and after deducting returned goods. With high return rates, for example in clothing, the reported and the actual value are far apart.

Attribution and incremental effect

Before a purchase, customers often see several ads on different channels. Which ad the revenue is attributed to is determined by an attribution model, for example by last click, by first contact or proportionally. Each platform counts from its own perspective, so that the sum of reported revenues often exceeds the actual orders. Consent requirements under data protection law additionally reduce the share of measurable purchases.

More important than attribution is the question of which revenue would not have arisen without advertising (incrementality). Ads on the company's own brand name often reach customers who wanted to buy anyway. This additional revenue can be measured with tests in which a region or target group as a comparison group receives no advertising.

New customers, repeat purchases and budget size

A ROAS below break-even can make economic sense if the new customers won order again later. What then counts is not the first order but the customer value over the whole customer relationship. Conversely, a high ROAS can be deceptive if it comes predominantly from existing customers, for example through ads to people who have already visited the shop (retargeting). A separate ROAS for new customers is therefore meaningful.

As the budget rises, ROAS generally falls, because the target groups most ready to buy are reached first. For budget decisions, therefore, the average is not decisive but the return on the additional euros spent.

Relevance for investors

In consumer goods and e-commerce, investors want to know whether growth is sustainable or is only bought with rising advertising spend. To this end they look at a cohort analysis, that is, the development of groups of customers acquired in the same month, plus the repurchase rate and the contribution margin after marketing. In addition they often relate total revenue to total marketing spend (marketing efficiency ratio, also blended ROAS), because this figure is independent of attribution models. Rising acquisition costs and dependence on a few advertising platforms enter the valuation as risks.

Worked example: calculating the ROAS of an online retailer

An online retailer spends EUR 50,000 a month on advertising. The platforms report EUR 238,000 of attributed revenue, including value added tax and before returns. The return rate is 20%, the margin after variable costs 35% of net revenue.

• Reported ROAS: 238,000 divided by 50,000 = 4.76
• Without value added tax: 238,000 divided by 1.19 = EUR 200,000, ROAS 4.0
• After returns: 200,000 × 80% = EUR 160,000, ROAS 3.2
• Break-even ROAS: 1 divided by 0.35 = 2.86
• Contribution margin before advertising: 160,000 × 35% = EUR 56,000; after advertising 56,000 minus 50,000 = EUR 6,000
• Profit on ad spend (POAS): 56,000 divided by 50,000 = 1.12
• A comparison test shows that 20% of the revenue would have arisen even without advertising: additional revenue 160,000 × 80% = EUR 128,000, ROAS 2.56, contribution margin 128,000 × 35% = EUR 44,800, after advertising minus EUR 5,200

The result means: the reported value of 4.76 looks comfortable, but economically the ROAS of 3.2 is only just above the break-even of 2.86. If the revenue that would have arisen anyway is taken into account, the retailer loses money on the first order with its advertising. It is worthwhile only if the new customers won generate enough contribution margin through repeat purchases. The question thus shifts from ROAS to customer value.

Distinction: ROAS, ROI, POAS and CAC

• ROI (return on investment): relates the profit of a measure to the amount invested. ROAS uses revenue and therefore says nothing about profit.
• POAS (profit on ad spend): divides gross profit or contribution margin by advertising costs. A value of 1 corresponds to break-even.
• Customer acquisition cost (CAC): covers all costs of winning a new customer, including agency, staff and software, and relates only to new customers. The CAC payback period shows when they have been earned back.
• LTV/CAC ratio: compares customer value with acquisition costs and thereby assesses the whole customer relationship rather than a single advertising measure.

Common mistakes

• ROAS read as profitability. A ROAS of 3 is a loss at a 25% margin and a profit at a 50% margin.
• Gross platform values adopted. Value added tax, returns and cancellations are not deducted, so the value is systematically too high.
• Platform values added up. The sum exceeds actual revenue because several platforms count the same purchase.
• Existing customers counted. Ads on the brand name and to earlier visitors raise ROAS without winning new customers.
• A single target for the whole range. Items with different margins need different target values.

Frequently asked questions

How is ROAS calculated?

As the revenue attributed to an ad divided by its cost. If EUR 10,000 of ad spend brings EUR 45,000 of net revenue, the ROAS is 4.5 or 450%. For an economic statement, revenue without value added tax and after returns counts.

What is a good ROAS?

That depends on the margin. A value is good if it is above the break-even ROAS, that is, above 1 divided by the margin after variable costs. At a 25% margin this threshold is 4, at a 50% margin it is 2.

Why do the figures of the advertising platforms differ from the accounts?

Because platforms often report gross values before returns, attribute purchases within a time window after the ad contact and claim the same purchase several times. The accounts record only the actual net revenue.

Does ROAS also matter in business with corporate customers?

Only to a limited extent. With business customers, months often pass between the ad and the signing of a contract. The cost per customer won is more meaningful there.

Does ROAS depend on the order value?

Yes. With the same cost per purchase, ROAS rises with the average order value. A higher order value improves the metric economically only if it is not bought through discounts that lower the margin.

The Roemer Capital view

For clients in consumer goods and e-commerce, Roemer Capital replaces the ROAS reported by the platforms with its own calculation when preparing a funding round. The basis is net revenue after returns from the shop system and the accounts. Investors thereby receive a figure they can reproduce in their review.

What matters most to Roemer Capital is whether the customers won through advertising buy again. It therefore shows cohorts with contribution margin after marketing. In doing so it checks whether the ratio of customer value to acquisition cost reaches at least 3 to 1 and whether acquisition costs are earned back in less than twelve months.