Is your marketing paying for itself?
Two quick checks in one. ROAS (return on ad spend) shows what your ads bring back for every 1 you spend. CAC (customer acquisition cost) shows what it costs you to win one new customer. Use plain numbers in any currency.
Both numbers must be more than zero.
Did the ads make you money?
A ROAS of 1 means the ads brought in exactly what they cost, before you have paid for the product or service you sold. To make money, your ROAS has to be higher than your break-even point, which depends on your margin. Add it in question 3.
What to do next.
ROAS only counts ad costs. It leaves out agency fees, staff time and other costs, and it depends on how well your sales are tracked back to the ads. For a full view of what your marketing returns, let's talk.
Both numbers must be more than zero.
Is a new customer worth what they cost?
CAC on its own doesn't tell you much. A CAC of 3 000 is cheap if a customer is worth 30 000 to you, and expensive if they are worth 2 000. Add the value in question 3.
What to do next.
Break-even ROAS
The lower your margin, the higher your ROAS needs to be.
ROAS (return on ad spend) is the sales your ads bring in, divided by what you spent on them. If you spend 10 000 and the ads bring in 40 000 in sales, your ROAS is 4.
Break-even ROAS is the point where the ads pay for themselves and for the product or service you sold. You work it out as 100 divided by your gross margin. With a 40% margin, you break even at a ROAS of 2.5. Anything above that is profit, before your other running costs.
That is why the same ROAS can be good for one business and a loss for another.
Break-even ROAS by gross margin
The ROAS you need just to cover your ad spend and the cost of what you sold.
How this works.
- ROAS = sales from ads ÷ ad spend. A ROAS of 4 means 4 back in sales for every 1 spent on ads.
- ROAS as a percentage = ROAS × 100. A ROAS of 4 is the same as 400%.
- Break-even ROAS = 100 ÷ gross margin (%). Below this, the ads cost more than the profit they bring in.
- Profit after ad costs = sales × gross margin − ad spend. This is before rent, salaries and other running costs.
- CAC = total marketing and sales spend ÷ number of new customers won in the same period.
- Customer value to CAC = what an average customer is worth (gross profit over the time they buy from you) ÷ CAC. Many businesses aim for a customer to be worth at least 3 times their CAC. That rule of thumb comes from David Skok's SaaS Metrics 2.0 guide for software businesses, so treat it as a guide rather than a rule.
ROAS is not the same as ROI.
ROI (return on investment) looks at profit after all the costs of a campaign, not just the ads. ROAS is quicker to work out and good for comparing ads and channels with each other. ROI tells you whether the whole effort was worth it.
Long sales cycles also matter. If your customers take weeks or months to buy, a low ROAS this month can still turn into sales later. Track results over a long enough period before switching ads off.
This calculator gives a quick estimate only and is not financial advice. Let's talk if you want help reading your ad results.
Questions
Frequently asked questions.
What is ROAS?
ROAS stands for return on ad spend. It is the sales your ads bring in, divided by what you spent on them. If you spend 10 000 on ads and they bring in 40 000 in sales, your ROAS is 4, or 400%.
What is a good ROAS?
A good ROAS is one above your break-even point, which depends on your gross margin. You work it out as 100 divided by your gross margin. With a 50% margin you break even at a ROAS of 2; with a 25% margin you need a ROAS of 4 just to break even.
How do I calculate break-even ROAS?
Divide 100 by your gross margin as a percentage. With a 40% gross margin, your break-even ROAS is 100 ÷ 40 = 2.5. Below that, the ads cost more than the profit they bring in.
What is CAC?
CAC stands for customer acquisition cost: what it costs you, on average, to win one new customer. Add up everything you spent on marketing and sales in a period, such as ads, agency fees, tools and the share of salaries, and divide it by the number of new customers you won in that period.
What is a good CAC?
It depends on what a customer is worth to you. Compare CAC with the gross profit an average customer brings in over the time they buy from you. If a customer is worth less than they cost to win, you lose money on every new customer. Many businesses aim for a customer to be worth at least 3 times their CAC, a rule of thumb that comes from software businesses.
What is the difference between ROAS and ROI?
ROAS only compares sales with ad spend. ROI (return on investment) compares profit with all the costs of a campaign, such as agency fees, staff time and the cost of what you sold. ROAS is useful for comparing ads; ROI tells you whether the whole effort paid off.