When running Google ads, one of the key metrics we marketers keep an eye on is ROAS, or Return on Ad Spend. But what is a “good” ROAS? This isn’t as simple as it sounds. Industry, business model, profit margins, advertising goals all play a role in what a good ROAS looks like for your businesses advertising efforts. In this post we’ll break down ROAS, why it’s important and what makes a “good” ROAS.
What is ROAS?
ROAS (Return on Ad Spend) is a performance metric that measures the effectiveness of digital ad campaigns. In short, it tells you how much revenue you make for every pound you spend on ads.
To calculate ROAS we divide Revenue generated from our campaign the advertising costs of that campaign.
ROAS = Revenue from Ad Campaign / Cost of Ad Campaign
For example, if you spend £1,000 in advertising budget and your campaign makes £5,000 in revenue, your return on ad spend is 5:1, meaning you make £5 for every £1 in ad spend.
Is There a Universal “Good” Return On Ad Spend?
The short answer is no—there’s no one-size-fits-all answer to what a good return on ad spend is. What is a good ROAS for you will depend on your business. Some may consider 4:1 or 5:1 to be great, others with lower profit margins or higher costs may need higher ROAS to be profitable.
Let’s get into the variables that make up a ROAS for different businesses.
Variables That Make a Good ROAS
1. Profit Margins
One of the biggest variables that affects return on ad spend is your business’s profit margin. Businesses with high margins can get away with a lower ROAS because they make more profit per sale. Businesses with lower margins may need a much higher ROAS to break even.
For example, an eCommerce business selling luxury products with high margins might be okay with a ROAS of 3:1, while a low-margin business like a discount retailer might need a ROAS of 10:1 just to be profitable.
2. Customer Lifetime Value (CLV)
ROAS only measures the immediate return on ad spend, but Customer Lifetime Value (CLV) can change what is a good ROAS. CLV is the total revenue a business expects to make from a customer over the course of their relationship with the company. If your business has high CLV, you can spend more to acquire customers and accept a lower ROAS on your initial ad spend.
For example, subscription-based services or companies that sell high-ticket items to the same customer multiple times can get away with lower return on ad spend from because they expect to make more money from that customer over time.
3. Ad Goals
Your ad goals will also determine what is a good ROAS. If your main goal is brand awareness, you may be okay with lower return on ad spend as you’re not looking for immediate sales. If your goal is direct conversions, you’ll want to go for higher return on ad spend.
For example, a start up looking to grow its customer base may run advertising campaigns that have low return on ad spend initially but provide long-term value through customer acquisition.
4. Industry Benchmarks
Different industries have different return on ad spend benchmarks. A strong return on ad spend in one industry may be weak in another. For example, highly competitive industries like fashion or consumer electronics have lower return on ad spend because of the intense competition for ad space. Niche industries or B2B sectors with higher margins and less competition can often get much better ROAS.
5. Advertising Campaigns across Ad Platforms like Google Ads
Where you’re running your ads matters. ROAS can vary greatly across platforms like Google Ads, Facebook, and Instagram. For example, Google Ads campaigns tend to have a better ROAS than social media ads because people searching on Google and seeing PPC Ads have stronger purchase intent. Social media ads can work well for broader brand awareness campaigns but may have a lower return on advertising spend.
What Are Some ROAS Benchmarks?
There’s no one-size-fits-all answer to what is a “good” return on ad spend, but many businesses aim for 3:1 or higher. This means they’re making £3 for every £1 spent on advertising costs. But 3:1 is not a hard rule and in some cases you may need to go higher.
Here’s a general guideline:
- 1:1: You’re breaking even, essentially the minimum ROAS – not sustainable in the long run.
- 2:1: A positive ROAS – You’re making money, but your margins are thin.
- 3:1: Good for most businesses.
- 4:1 or 5:1: Great ROAS, especially for low-margin businesses.
- 10:1 or higher: Exceptional, but rare outside of high-margin niches.
It Isn’t Everything
While return on ad spend is important, don’t fixate on it. Businesses should also consider other metrics like ad campaign cost per acquisition (CPA), conversion rates and return on investment (ROI). Focusing only on return on ad spend can cause you to ignore other parts of your advertising strategy that affect overall profitability.
For example, you may have a high return on advertising spend but if your CPA is too high or your margins are too low you may not be profitable. Or you may have lower a ROAS but your ad campaigns are helping you grow your customer base and increase customer lifetime value over time.
ROAS Tracking
ROAS tracking is key to knowing how well your ad spend is performing and if it’s delivering profit. The best way to track return on ad spend is with robust conversion tracking tools that measure campaign performance. Google Ads has built in conversion tracking features so you can track how much revenue your Google Ads campaigns are making in real time.
By setting up conversion tracking you can link specific actions (purchases or sign ups) back to your advertising efforts and get a clear view of revenue generated and your return on ad spend. This data is key to optimising campaigns, adjusting bids and re-allocating budget based on campaign performance.
Conclusion: What’s the Best ROAS for You?
In the end, the answer to the question is unique to your business model, profit margins, customer lifetime value and advertising goals. While 3:1 or higher is a good general rule of thumb, the real measure of success is whether your return on ad spend is driving sustainable growth and profitability for your business.
Return on ad spend is an important metric but it’s one piece of the puzzle. Understanding your overall financials – profit margins and customer lifetime value before you calculate ROAS – will help you figure out what good looks like.
Whether you’re looking to improve your return on ad spend, weighing options for the best suited eCommerce PPC Agency, or wanting to better understand how ROAS fits into your overall marketing strategy or ad campaigns, feel free to contact our team for expert advice.