5x ROAS. You see that number and think, "hey, this looks pretty good!" But hold up, my friend. Before you pop the champagne, let's talk about why focusing solely on ROAS can lead you down a dangerous path. Enter Net ROAS.
To illustrate the power of focusing on Net ROAS, let's consider a real-world example. Imagine an online retailer who sells high-end skincare products. They launch an ad campaign that generates a Gross ROAS of 5:1, meaning for every dollar spent on ads, they generate five dollars in revenue. Impressed by these numbers, they double their ad spend, expecting to see a corresponding increase in profits.
However, when they calculate their Net ROAS, they realize that their actual profitability is much lower. The cost of sourcing the skincare products, packaging them, and shipping them to customers eats into their margins.
So imagine that for every $100 they sell:
- COGS = $30
- Shipping = $15
- Return rate = 20%
- Ad spend = $20
The math:
- $100 - 30 - 15 - (0.2 * 100) = $35 in net revenue
- $35 / $20
- Net ROAS of 1.75x
That’s still good. But nowhere near as good.
They also discover that the increased ad spend has led to a higher volume of customer inquiries and returns, putting additional strain on their customer support team. Which they can then add as another cost variable in their formula.
By focusing on Net ROAS, they're able to identify these hidden costs and make adjustments to their campaign strategy to optimize for profitability rather than just revenue.
That's the problem with relying on Gross ROAS alone. It doesn’t mean much in a vacuum. You need to dig deeper and consider all the expenses that go into generating that revenue. Net ROAS is your true north, guiding you towards sustainable profitability.
A few quick and easy formulas to figure out what you actually need to hit to make money.
Net ROAS:
- (Revenue - COGS - Taxes - Shipping - estimated returns value) / Spend
- A simpler but less accurate way to calculate this is to use a blended multiplier that represents your margin. Like: (Revenue*0.5)/ Spend
Another quick and easy favorite of mine is to use your fully-loaded margin to get to your Breakeven ROAS:
- 1 / (margin) = breakeven ROAS
- If your margin is 10%, you need a 100x ROAS to breakeven (don’t bother advertising)
- If your margin is 80%, you only need a 1.25x ROAS to breakeven (congrats - you have some crazy moat and you’re printing money)
- In the make-up example from earlier, the margin was 35%. The breakeven was 2.85x ROAS
Great, that’s it! Hope this helps.
First time here? I share insights like these every month. If you know someone who could benefit, share this post with them! Browse our archive of posts from the past - like this one on a reddit research tool to expedite ICP discovery or how to use google trends to forecast demand for your niche.
Subscribe if you want more.
Need help with marketing or know someone who does? Drop me a message at alvin@adsbyalvin.com to see how I can help. I’ve grown brands like Airbnb, Upwork, Vital Proteins, and Spotify.
I also share playbooks, templates, and knowledge for all things marketing / productivity that you can download here - like this workflow for creating profitable facebook ads utilizing AI.
.jpeg)