We often receive different objectives from multiple stakeholders, which can be extremely confusing. The CEO wants to see banner ads plastered across popular websites. The Marketing Director wants the best click-through-rate in the industry. The Finance Director wants to grow revenue. So, who’s right at the end of the day? Achieving advertising success is often subjective, yet most of these objectives are just secondary metrics that latter up to one primary goal. Optimizing to maximize the efficiency of one metric may kill the success of another.
What is a good return on advertising spend?
Return on Ad Spend (ROAS) is just one metric that represents what you get back in revenue or value per dollar that you spend in advertising. ROAS is a useful performance indicator, but it doesn’t account for costs beyond media spend, like product margins, labor, or fulfillment. That’s where ROI comes in.
ROI, or Return on Investment, goes deeper by factoring in all business expenses to show whether your marketing efforts are actually profitable. You can have a high ROAS and still lose money if your costs outweigh your revenue.
It’s important to understand all metrics and how they interact with each other. So, what is a good return on advertising spend? Well, that all depends. We may want to ask some other questions:
- At what point is my ROAS positively impacting profitability or value?
- At what point does efficiency start to inhibit growth?
- What other metrics eventually impact profitability or value?
- How does my ROAS compare to my break-even ROI?
The inverse relationship between efficiency and volume impacts performance
The end goal in utilizing advertising should be maximized returns whether that be profit or some other value point. One thing we do know, anything less than a 1:1 ROAS is bad for business; it means you’re losing money. However, as ROAS climbs beyond 1:1, you don’t necessarily make more money, as you’ll read further below. You can’t have the best of both worlds, but you can have a little piece of each.
Important Factors to Understand
Break-even return on investment (ROI): Advertisers seldom have visibility into their client’s business costs (e.g., labor). Understanding the break-even ROI can help advertisers determine a good return on advertising spend—whether ROAS is profitable or not. If a company breaks-even at a 2:1 ROI, then your ROAS needs to be above that and not 1:1.
Value vs Revenue: In many cases, your goal may be implicitly intangible. It could be an offering, such as information for website browsers. Revenue is much easier to quantify as the value of information is completely subjective. Although difficult, it’s best to determine the value your client places on a particular action users perform.
Performance Campaigns vs Others: Startups and new businesses/products/services alike don’t always make money at first or ever for that matter. It may be more important for them to invest in awareness. There are also other intangible objectives such as improved corporate responsibility or environmental consciousness, but for the sake of this article, we’ll focus on digital performance-based campaigns that are tangible and easier to measure.
How to Calculate ROAS and ROI
If you want to optimize for real performance, you need to understand how to calculate both ROAS and ROI. These two metrics are often used interchangeably, but they tell very different stories.
ROAS (Return on Ad Spend) is a top-line metric that tells you how much revenue you generated for every dollar spent on advertising. It’s calculated like this:
ROAS = Revenue from Ads / Ad Spend
Example: If you made $10,000 in revenue from $2,000 in ad spend, your ROAS is 5:1.
This tells you how efficiently your advertising is driving revenue—but not whether that revenue is profitable.
ROI (Return on Investment) takes it further by including all relevant costs beyond ad spend, like product costs, salaries, software, shipping, and overhead. It’s calculated like this:
ROI = (Net Profit / Total Investment) x 100
Example: If you spent $5,000 total (including $2,000 in ads) and generated $10,000 in revenue, your net profit is $5,000. Your ROI would be 100%.
Your ads are frequently optimized to the wrong metric
In the chart below, you can see the performance of various metrics in regard to particular ad positions. Consider all things equal (e.g., Sales / Click) as there are outlying factors that can influence these metrics.
You’ll see that if we optimize the following metrics, we either lose thousands of dollars or miss an opportunity to maximize dollars, believe it or not, this happens all the time:
- Highest CTR
- Highest Ad Position
- Lowest Cost / Sale
- Highest ROAS
- Highest Profit / Sale
The best way to maximize your return is to optimize to Profit (or value like thereof). You may experience an agitated marketing manager who had a ROAS goal of 9:1. He may have shuttered at the 4:1 ROAS on his report, yet the finance department will shake your hand and throw a party with all the money they are making.
Understanding the relation between ROAS and ROI
ROAS and ROI are closely related, but they tell different parts of the performance story. ROAS shows how efficiently your advertising drives revenue; ROI shows whether that revenue actually translates into profit. To understand the bigger picture, it helps to break down how ad mechanics influence both.
Ad Position → CTR → Clicks → Sales
As ad visibility improves, so does your click-through rate. That means you get more clicks per impression shown. Some of those clicks will then convert to sales, increasing your revenue—and by extension, your ROAS.
Ad Position → CPC → Cost Per Sale → Profit Per Sale
Advertisers pay for their ad position, and premium placements typically have higher CPCs. As your CPC rises, your cost per sale increases, which can eat into your profit margins. That’s where ROI takes the lead—it considers your costs, not just your revenue.
If you only look at ROAS, you might think you’re winning. But if your profit margins are slim or your overhead is high, your ROI could still be negative. On the flip side, focusing solely on Profit Per Sale might lead you to reduce spend so much that you lose sales volume.
At some point, dialing back ad costs to improve ROI can hurt ROAS by limiting scale—and vice versa. The sweet spot lies in balancing volume and efficiency. As you pay less per click, your ad position suffers, you attract fewer clicks, and your ROAS looks better on paper—but your total profit may decline.
Optimize at the point of diminishing returns
To optimize to Profit, you have to know the point of diminishing returns, which is the optimal balance of volume and efficiency. In reference to the Chart 1 and illustrated in Chart 2, we learn two things:
- A decrease in Cost / Sale does not equal greater Profit
- Profit diminishes above and below a 4:1 ROAS
By identifying the point of diminishing returns, we can also reverse engineer budget. We know that Profit is greatest at a $9.4K investment (via Chart 1); we should invest no more and no less.
Final thoughts
ROAS might get the glory, but ROI tells the real story. You can’t scale performance by chasing surface-level metrics alone—true growth happens when you understand how every advertising dollar contributes to your bottom line. That means knowing when to prioritize efficiency, when to lean into volume, and how to recognize the trade-offs in between.
At Symphonic Digital, we cut through the noise. We help performance-driven brands focus on the metrics that actually matter, like profit, lifetime value, and sustainable growth. Whether you're under pressure to hit a 9:1 ROAS or stretch your budget further, we’ll guide you toward smarter decisions that support your real business goals. Explore our Digital Media Services to learn how we can optimize your advertising performance today.
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