ROAS (Return on Advertising Spend) measures how much revenue is generated for each unit of advertising spend. It is a media-efficiency metric, not a complete measure of profitability.
How it works
It is calculated by dividing conversion value attributed to advertising by advertising spend. A ROAS of 5 means $1 of spend is associated with $5 in revenue. It should be read with margin, variable costs, returns and fulfillment costs.
Practical example
An ecommerce business spends $10,000 on campaigns and attributes $50,000 in sales: ROAS is 5. With low margins, however, that result may still be insufficient to generate profit.
Why it matters
It is useful for comparing campaigns, channels and bidding strategies and for understanding whether media pressure is creating enough value relative to capital invested.
What to watch
The main mistake is treating ROAS as profit. A high ROAS can coexist with weak margins or limited growth when spend is too low.