Among the many ways to define the success of your Google ads campaigns, one metric stands out and should be your priority, it’s the ROAS.

ROAS = Return on ad spend

Put differently, for every dollar, you spend on advertising, how much do you get back?

How to calculate ROAS

It’s actually very simple to calculate. You need to determine:

• How much money do you spend on Google Ads (ad spend)
• How much money do you make on the products sold by those ads (revenue)

And use this formula:

Revenue / Ad spend = ROAS

Here’s an example. Let’s say you spent $500 in ads and made $1000 in revenue this month. Your formula would look like this:

1000 (Revenue) / 500 (Ad Spend) = 2

You’re looking at a 200% (2X) ROAS.

In the case above, you doubled your dollars. However, for many businesses, 200% might not even be breaking even.

So, you need to calculate the ROAS that is most suitable for your business.

Your target ROAS (or ROAS goal)

Calculating your break-even ROAS

Before looking at expanding your sales, you first need to understand your break-even point. For that, you need the revenue, the cost of goods sold, and any other costs related to the sale.

For example, you’re selling a product that generates you $100 in revenue. It has a cost of goods sold of $20 and you have other costs accounting for $15, which gives you a profit of $65.

This means that every time you sell this $100 product, you make $65. So, it means that you’ll break even on your ad spend at $65. If you spend $64, you’re making $1, and if you spend $66, you lose $1. $65 is your break-even.

Using the above formula, meaning spending $65 to make $100, gives you a ROAS of 1.54.

100 (Revenue) / 65 (Ad Spend) = 1.54

Any ROAS lower than 1.54, you’re losing money. Anything higher, you’re making money.

Defining your target ROAS

When it comes to defining your target ROAS, it depends on your objective.

Objective: Growth

If you’re looking for growth and want to be very aggressive, you can go for a target ROAS very close to your min ROAS.

In the above example, the min ROAS is 1.54. Looking for growth or being aggressive could mean a target ROAS between 1.5 to 2. It’s that simple.

Objective: Profitability

If profitability is your priority, then you’ll end up with a higher ROAS than your min ROAS. 

To do so, you need to define how much you will actually want to spend of your profit on paid ads.

Let’s use the same example, and summarize: revenue – $100, cost of goods sold – $20, other costs – $15, profit per sale – $65. So, it’s the exact same product and profit margin.

And, again, to be break-even, you’d spend $65. So, if you want to be more profitable, it means you need to spend less than $65. This time you’ll add the percent of profit you actually want to spend on paid ads. Let’s say in this case only 30%.

This means 30% of $65 is $19.50. So, that’s the target of how much you want to spend to get a sale, and that gives us a target ROAS of 5.13.

100 (Revenue) / 19.50 (Ad Spend) = 5.13

Other variables to consider before setting up your target ROAS

Adjusting to other costs

If you expect some extra costs for the international sales, then, you can simply add them to the calculation. And you’ll see that mechanically, the ROAS will increase, which guarantees you the same profit.

You may consider some extra costs in doing business internationally to have a more precise idea of your profit, and in consequence, your target ROAS. The target ROAS for international campaigns may end up being higher than the one you target on your domestic ads.

You could also be more aggressive by keeping the same target ROAS as for your domestic campaigns. This means you’re spending a higher share of your profit on ads.

Understanding the competition in international markets

Depending on your product category, you also need to keep in mind that going global means that you will face new competition in each new market you’re entering.

In some markets, it can occur that you’ll face tougher competition on your products. When that happens, if you raise your target ROAS too high in favor of profit, you’ll end up making little to no sales.