"What is ROAS? (and how it differs from profit)"

Ad dashboards love a number called ROAS. It appears in green, it looks reassuring, and it is easy to confuse with making money. Let us separate what it says from what it does not.

The definition

ROAS stands for return on ad spend. You calculate it by dividing the sales attributed to your ads by the money you spent on those ads.

ROAS = ad-attributed sales divided by ad spend.

It tells you how many rupees of sales came back for each rupee spent. It says nothing about what it cost you to make and ship those sales.

A Rs 10,000 example

Suppose you spend Rs 10,000 on ads in a month, and your dashboard shows Rs 30,000 of sales coming from them. These numbers are illustrative.

ROAS = 30,000 divided by 10,000 = 3. People call it 3x.

That sounds great. Three rupees of sales for every rupee spent. But sales are not profit.

Why margin still matters

Now bring in your margin. Say that after the cost of the product, packaging, shipping and payment charges, you keep Rs 35 of every Rs 100 of sales. This is an assumed figure for the example, and yours will differ. What is contribution margin shows how to find your own.

• Contribution from Rs 30,000 of sales: 30,000 x 35 percent = Rs 10,500.
• Ad spend: Rs 10,000.
• Left over: 10,500 minus 10,000 = Rs 500.

So a 3x ROAS left you with Rs 500 before your fixed costs, returns and your own time. That is almost nothing.

Now change the margin to 30 percent. Contribution is 30,000 x 30 percent = Rs 9,000, and after the Rs 10,000 spend, you are Rs 1,000 behind. The same 3x ROAS loses money.

Change it to 50 percent. Contribution is Rs 15,000, and after the ad spend you have Rs 5,000. Same ROAS, a very different result. The number only means something once you know your margin.

The break-even idea

There is a ROAS at which you exactly cover ad spend and nothing more. It is one divided by your contribution margin as a decimal. At 35 percent, that is 1 divided by 0.35, about 2.86. Below that you lose money on ads alone, and above it you earn something. I will not tell you what ROAS to aim for in general, because it depends entirely on your margin. Break-even ROAS calculation shows the steps, and ROAS vs actual profit, an example gives another case.

Things the dashboard may hide

• Returns and RTO. If many COD parcels come back, the sales in the dashboard were never completed. What is RTO and why it hurts sellers explains.
• Discounts and free shipping given to win the order.
• Sales that would have happened without the ad, for example from people who already knew you.
• Repeat orders. A low ROAS on a first order may still pay back over time. What is customer lifetime value discusses that.

A practical routine

Once a month, write down ad spend, ad-attributed sales, ROAS, and your contribution margin. Multiply sales by margin, subtract spend, and see the real figure. If it is negative or tiny, fix the offer, raise the price, lower the cost or pause the ads. If it is healthy, spend a little more and watch.

ROAS is a useful signal and a poor verdict. Pair it with margin, and the green number on the screen starts to match the number in your bank.