ROAS (Return On Ad Spent) is a metric that allows you to measure the profitability of online advertising. It is calculated by dividing the revenue generated by advertising by the amount spent.It is often considered the first metric to track when analyzing an advertising account, as it allows you to quickly determine if current investments are profitable or not.
This is a question regularly asked by clients: "What ROAS do I need to be profitable?" The answer is not as straightforward as you might think, because it depends on the amount invested: the more you invest, the more your ROAS is likely to decrease.Let's take a concrete example to illustrate my point.You are a jewelry brand and decide to launch Facebook Ads (Meta Ads). You start with 1200 monthly budget for acquisition only.You decide to launch an acquisition campaign with a budget of 40 euros per day. What will the algorithm do?First, it will search for the people most likely to purchase within your acquisition audience. Cold traffic closest to your customers.So the first returns will be quite positive and you will manage to sell. You will be able to generate 6000 in revenue and a ROAS of 5.Given the results, you decide to increase your budget and spend 2400 on your acquisition campaign, or 80 per day.After reviewing the numbers, you realize that while your spending has doubled, your revenue has not doubled and has only increased by 35%. You therefore have revenue of 8100 with a ROAS of 3.3.Why? Because the more budget you spend, the more the algorithm will search for people who are less and less likely to purchase, and the more your growth will slow down.But the good news is that slowing growth does not necessarily mean loss of profitability.How do you calculate actual profitability on Meta Ads?The profitability of your campaigns must be calculated by looking at your net revenue.Net revenue is the difference between the revenue generated by advertising and the amount you spend.If we take the example above, here is the calculation that shows that despite a declining ROAS, your revenues are actually increasing:(Revenue = 6000 - Amount spent = 1200) = 4800 net revenue.(Revenue = 8100 - Amount spent = 2400) = 5700 net revenue.So we clearly see that you are making more money by spending 2400 despite a lower ROAS.
To calculate your target ROAS, you need to determine the budget you want to spend on the platform.Let's say for this example you have decided to spend 2000.Next, you need to calculate your margin. Let's say your margin is 50%. The product therefore costs you half the selling price. For each product you sell for 50, you therefore have a margin of 25.This means that to have a ROAS of 1 and therefore be in positive balance, you will need to generate revenue of 4000. This is the ROAS you calculated and not the one displayed by the platform.If you make 4000 in revenue:ROAS displayed by the platform = 2ROAS after calculating the margin = 1If you make 8000 in revenue:ROAS displayed by the platform = 4ROAS after calculating the margin = 2To recoup your investment, you will therefore need to target a ROAS of 2 on the platform.
It's up to you to determine what ROAS you want based on what you want to spend on the platform.Calculate it by taking into account several factors such as your margin, your expenses... You can also take into account other expenses such as a possible partner.I hope that with this article you will have understood that a ROAS target is not fixed, it varies depending on numerous parameters.The KPI to especially watch is net revenue. Even if your ROAS has decreased, you must especially verify whether your net revenue has increased or not. Only then will you be able to determine whether or not your advertising is profitable.
