When evaluating digital ad campaigns, ROAS (Return on Ad Spend) is often the first metric marketers check. While ROAS gives insight into revenue generated per advertising dollar, relying on it alone can be misleading. True business profitability depends on several other factors, from product costs to operational expenses. This guide breaks down why ROAS can paint an incomplete picture and which profit-based metrics you should track to make smarter decisions.
What is ROAS?
ROAS measures the revenue generated for every dollar spent on advertising:
ROAS = Revenue from Ads ÷ Cost of Ads
Example:
If you spent $500 on ads and earned $2,000 in sales from those ads:
$2,000 ÷ $500 = 4 ROAS (or $4 earned per $1 spent)
While a ROAS of 4 seems great, it doesn’t automatically mean you are profitable.
Why ROAS Alone Can Be Misleading
- Ignores Product Costs
ROAS only accounts for ad spend, not the cost of goods sold (COGS). A high ROAS on low-margin products may still result in losses. - Excludes Operational Expenses
Warehouse, shipping, packaging, and employee costs are not included in ROAS. - Doesn’t Factor in Discounts or Returns
Returns, refunds, or promotions reduce actual revenue, which ROAS doesn’t reflect. - Overlooks Lifetime Value (LTV)
Focusing solely on ROAS may undervalue customers who make repeat purchases or long-term subscriptions.
Profit-Based Metrics to Track
To get a complete picture of campaign profitability, consider these metrics:
1. Gross Profit Margin
Formula:
Gross Profit Margin (%) = (Revenue – COGS) ÷ Revenue × 100
Shows the percentage of revenue left after covering product costs.
Example:
Revenue: $2,000
COGS: $1,200
Gross Profit: $800
Gross Margin = $800 ÷ $2,000 × 100 = 40%
2. Net Profit
Formula:
Net Profit = Revenue – (COGS + Ads + Operating Expenses)
Net profit measures your actual earnings after all costs.
Example:
Revenue: $2,000
COGS: $1,200
Ad Spend: $500
Other Expenses: $200
Net Profit = $2,000 – ($1,200 + $500 + $200) = $100
3. ROAS Adjusted for Profit (Profit ROAS)
Instead of using revenue alone, calculate ROAS based on net profit:
Profit ROAS = Net Profit ÷ Ad Spend
Example:
Net Profit: $100
Ad Spend: $500
Profit ROAS = $100 ÷ $500 = 0.2
This shows your campaign is only earning $0.20 profit per $1 spent, which is far less impressive than a standard ROAS of 4.
4. Customer Acquisition Cost (CAC)
Formula:
CAC = Total Marketing Cost ÷ Number of New Customers Acquired
Helps determine how much you spend to gain a new customer. Compare CAC with customer lifetime value (LTV) to ensure sustainable growth.
5. Return on Investment (ROI)
Formula:
ROI (%) = (Net Profit ÷ Total Investment) × 100
Unlike ROAS, ROI considers all costs, not just ad spend. It gives a true sense of whether your campaigns are profitable overall.
Best Practices for Profit-Driven Marketing
- Track multiple metrics: Combine ROAS, gross margin, net profit, and CAC for a full picture.
- Segment campaigns by product margin: High-margin products may sustain lower ROAS.
- Account for recurring revenue: Include subscription or repeat purchase revenue in calculations.
- Use tools: Platforms like Shopify, Google Analytics, and Facebook Ads Manager can integrate cost and profit data.
FAQ
Is a High ROAS Always Good?
Not necessarily. High ROAS on low-margin products may still be unprofitable once all costs are included.
How do I Calculate Profit ROAS?
Profit ROAS = Net Profit ÷ Ad Spend. It shows how much profit your ad spend is generating.
What’s a Healthy net Profit Margin?
Depends on the industry, but generally 10–30% is considered healthy for e-commerce businesses.
Should I Stop Campaigns with Low ROAS?
Not always. Check product margins, LTV, and long-term profitability before deciding.
How often Should I Review Profit Metrics?
Monthly or per campaign cycle to ensure ad spend is sustainable.
Bottom Line
ROAS is a useful metric, but it doesn’t tell the whole story. True profitability comes from tracking profit-based metrics like gross profit margin, net profit, CAC, and ROI. By focusing on these numbers, you can make smarter marketing decisions, optimize campaigns, and grow your business sustainably.
