ROAS vs ROI: One Ratio Counts Revenue, the Other Counts What Is Left
ROAS divides revenue by ad spend, ROI divides profit by it. The one-line conversion between them, and why a 3.74 ROAS can be a gain or a loss.
A campaign spends $10,000 and the platform credits it with $37,410 of revenue. The ROAS is 3.74. Someone in the meeting subtracts the spend from the revenue, divides by the spend, and announces an ROI of 274 percent. Nobody objects, because both numbers came from the same two inputs and both look like good news. Only one of them is a return on investment. The real figure for that campaign is 57.1 percent on gross profit, and 28.6 percent once the rest of the overhead is paid.
ROAS and ROI are not two names for one idea, and they are not rivals where you have to pick a side. They answer different questions, and one converts into the other with a single multiplication. This guide covers the two formulas, the conversion between them, and which decisions belong to which number.
The two formulas side by side
ROAS = Revenue attributed to ads / Ad spend
ROI = (Profit from the ads - Ad spend) / Ad spend
where profit from the ads is revenue x margin,
usually gross margin or contribution marginROAS has revenue on top. ROI has profit on top, minus the spend that bought it. That one difference decides everything else. Revenue is the figure the ad platform can see, so ROAS is the number the platform reports and bids against. Profit depends on your cost of goods, fees, shipping and returns, which the platform never sees, so ROI has to be built outside it, in a spreadsheet or in the marketing ROI calculator.
Using the worked example: revenue $37,410, cost of goods $21,698, so gross profit is $15,712 and gross margin is 42.0 percent. ROAS is 37,410 divided by 10,000, or 3.74. ROI on gross profit is 15,712 minus 10,000, divided by 10,000, or 57.1 percent. Both figures describe the same month. They are simply measuring different layers of it.
The conversion: ROI = ROAS x margin - 1
Substitute revenue x margin for profit in the ROI formula, divide through by spend, and revenue over spend turns back into ROAS. What is left is the most useful identity in this part of the P and L:
ROI = ROAS x Margin - 1
ROAS = (1 + ROI) / Margin
Check: 3.741 x 0.420 - 1 = 0.571, or 57.1%The conversion makes two things obvious. First, ROI is zero exactly when ROAS equals 1 divided by margin. That is break-even ROAS, 2.38 at a 42.0 percent margin, and it is why the break-even ROAS calculator only needs one input. Second, the same ROAS produces a completely different ROI as soon as the margin moves. ROAS on its own cannot tell you whether you made money. It needs a margin beside it before it means anything.
The same ROAS at four margins
Hold ROAS at 3.74 and change only the gross margin. The ad platform reports the same number in every row. The business does not have the same month in any of them.
| Gross margin | ROAS | Break-even ROAS | ROI on gross profit |
|---|---|---|---|
| 20% | 3.74 | 5.00 | -25.2% |
| 30% | 3.74 | 3.33 | +12.2% |
| 42% | 3.74 | 2.38 | +57.1% |
| 60% | 3.74 | 1.67 | +124.5% |
This is why a ROAS target copied from another store, an agency deck or a forum thread is close to meaningless. A 3.74 that is excellent for a 60 percent margin skincare brand loses a quarter of every dollar for a 20 percent margin electronics reseller. The ROAS is identical. The cost of goods is not, and ROI is the number that carries the cost of goods.
The 274 percent mistake
The figure from the opening comes from putting revenue where profit belongs: 37,410 minus 10,000, divided by 10,000. That is ROAS minus 1, written as a percentage, and it is the most common way ROI gets inflated in marketing reports. It assumes the product cost nothing to make, ship or return. On the worked example it overstates the return almost five times.
There is a second, quieter version of the same error. ROI on gross profit, 57.1 percent here, still ignores every cost that sits below gross margin. The worked example carries $12,850 of operating expense, of which $10,000 is the advertising itself and $2,850 is everything else. Net profit for the month is $15,712 minus $12,850, or $2,862, which is 28.6 percent of the ad spend. Which one you report depends on the question. For a decision about one more dollar of spend, gross or contribution ROI is right, because the overhead does not move with that dollar. For a decision about whether the business works, the net figure is the honest one.
| What goes on top | Result | What it actually is |
|---|---|---|
| Revenue minus spend | 274.1% | ROAS minus 1. Not a return. |
| Gross profit minus spend | 57.1% | Marketing ROI on gross margin |
| Net profit after all opex | 28.6% | What the month left the owner |
Which number belongs to which decision
ROAS belongs inside the ad platform. Bidding systems optimise to conversion value because conversion value is the only outcome they can observe, so a target ROAS is the language you set the target in. It is also the faster read: a ROAS can be checked daily per campaign without anyone opening the accounts.
ROI belongs to the budget conversation. Whether to move $5,000 from search to social, whether a channel deserves to exist, whether the quarter paid for itself: none of those can be answered in revenue, because revenue is not what the business keeps. The marketing ROI formula guide goes further into baseline sales and attribution windows, which change the sign of ROI more often than the margin does.
The two are linked by the conversion above, so you do not have to choose. Decide the ROI you need, convert it to a ROAS with your margin, and hand that ROAS to the platform. At a 42.0 percent margin, a 50 percent ROI needs a ROAS of 3.57, and a 100 percent ROI needs 4.76. If the margin changes, the target changes with it, even when nothing in the ad account did.
Where the conversion breaks
Three situations make the simple identity wrong, and each one is common enough to check for.
Variable costs that are not in cost of goods. Payment fees, pick and pack, free shipping and returns all scale with orders. If they are material, use contribution margin instead of gross margin in the conversion. The contribution margin calculator builds it, and POAS is the same idea expressed as a ratio.
Revenue the platform counted that you did not keep. If conversion value includes sales tax or shipping, the ROAS is inflated before the margin is applied. The ROAS formula guide covers how to strip it out.
Customers who come back. A first-order ROI can be negative on a product people reorder every month. For subscription and replenishment businesses, ROI on the first order understates the return and the comparison belongs against lifetime value, not order value.
What to do this week
Take your account's ROAS for the last 30 days and your gross margin for the same period, from the accounts rather than a guess. Multiply them and subtract 1. That is your ROI on gross profit, and it is the number to bring to the next budget meeting instead of the ROAS. Then reverse it: decide the ROI the spend has to earn, divide 1 plus that ROI by your margin, and compare the answer with the target ROAS currently set in the platform. If they differ, one of them is wrong, and it is usually the one nobody has recalculated since the margin last moved. The ROAS calculator and the marketing ROI calculator will check both sides.
The figures here are illustrative. They come from the worked example used across this site, built so that every intermediate reproduces the printed result, not from a survey or from any one store. Margins differ by sector and by how you define cost of goods, so use your own.
Related reading: what is a good ROAS and the marketing efficiency ratio.