Having profitable customer acquisition is essential in driving growth that’s sustainable and scalable for small to medium businesses. Being able to calculate what a profitable return on ad spend (ROAS) is for your business will enable you to input the right targets in your Google Ads campaign to allow machine learning to optimise for the correct outputs — those that align with your business goals.
How to calculate ROAS
Calculating ROAS is very simple; most ad platforms will do this for you as a standard reporting metric.
To do it manually, all you need to do is:
Revenue generated from ads/by amount spent
ROAS is most commonly shown as a ratio. For example, 2:1 ROAS means that for every £1 spent on advertising, £2 was generated in revenue.
Return on ad spend can also be shown as a percentage. In the example above, our ROAS would be 200%, which still means £2 was generated for every £1 spent.
Calculating a profitable ROAS
Looking at the basic ROAS calculation, we can see that while this is some measure of return, it doesn’t take into account a number of other key factors.
Most importantly, product cost/margin.
As the saying goes, “Revenue is for vanity, profit is for sanity”.
If we sell a product at £50, we spend £25 on advertising, and it also costs us £25 to buy initially, we’ve made no profit from this acquisition.
Our 2:1 ROAS here isn’t “good”.
As a very simplistic example, in this scenario, we would want to look for a higher ROAS so that we’re making at least some profit on our advertising efforts.
Calculating a profitable ROAS is a different task than calculating ROAS alone.
Other factors
Product cost is one core outlay involved in customer acquisition alongside ad spend.
Other factors you may wish to consider are tax, shipping, and management fees if you’re using an agency, as well as some reasonable operating expenses.
This is where we get into the realm of calculating return on investment (ROI) rather than return on ad spend.
It’s challenging to get this to perfection. If you have wider operating expenses that other channels utilise, you have to find a point where you aren’t penalising ads and putting too much expectation on the channel.
Paid media can do many things, but it shouldn’t be expected to carry the business’ outgoings (although it often does).
What’s the best way to calculate a profitable ROAS?
For most businesses, knowing that ads are profitable on ad spend and product/service cost is more than enough to invest and scale ad activity.
The added value of repeat sales, referrals, and increasing email list size offsets the potential nitpicks of ‘what about other costs?’.
We have this conversation with all of our clients, and we’ve made it easy for you!
Introducing the ProfitSpring calculator! Simply input:
Spend
Return
Orders
Approx gross margin
We’ll calculate your current ROAS, tell you if it’s profitable on ad spend and product costs and then give you your break-even point and a minimum suggested target to aim for.
We hope this helps you achieve more profitable activity. Try the calculator for yourself here.
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