ROAS

Also called Return on ad spend, ROI on advertising

Revenue produced per pound of advertising. Looks like profitability and is not.

What it means

Return on ad spend is revenue attributed to advertising divided by the cost of that advertising. A ROAS of 4 means £4 of revenue for every £1 spent.

Return on investment is the related figure calculated on profit rather than revenue, which is the one that matters.

Why it matters

A ROAS of 4 sounds excellent and can be a loss. If your gross margin is 20%, £4 of revenue is 80p of gross profit against £1 of spend.

Your break-even ROAS is simply 1 divided by your gross margin. At a 40% margin it is 2.5; at a 20% margin it is 5. Knowing that number before you start is the difference between advertising and gambling.

What it looks like in practice

Calculate your break-even ROAS and write it on the brief. Any agency or platform target should be set against it.

Use gross margin, not revenue, wherever you can. Some platforms allow a profit value to be passed instead of order value, which makes their automated bidding optimise for the right thing.

What to watch out for

Platform-reported ROAS, which is self-reported by the party being paid and usually generous about attribution. Compare it against your actual total revenue trend.

Ignoring new-versus-returning customers. A high ROAS achieved by advertising to people who would have bought anyway is not incremental.

Where to get proper advice

Your accountant for the true gross margin. Everything else you can work out from that one number.