Return on Ad Spend (ROAS) often looks impressive on the surface — a 400% ROAS sounds like a clear win. But does it tell the whole story? Without factoring in margins, direct and indirect costs, ROAS can quickly become a vanity metric, leading to decisions that look good on paper but don’t translate to real profits.

This article explores why ROAS is insufficient on its own, how to calculate true profitability using ROI, and what long-term strategies you can apply to build a sustainable growth engine.

👉 Ready to find your real numbers? Try our E-commerce Profit Calculator to model your true marketing ROI.

1. Why ROAS Is a Misleading Metric

ROAS measures revenue relative to ad spend. The formula is simple:

ROAS = Revenue / Ad Spend

The problem is what this formula ignores:

  • It ignores profit margins. A $100 sale with a 20% product margin only generates $20 in gross profit before any other costs are considered.
  • It excludes operational costs. Logistics, SaaS tools, rent, and staff salaries are all invisible to ROAS.
  • It has a short-term view. It focuses on immediate revenue from a campaign, not the long-term value a new customer might bring.

📊 According to a 2024 HubSpot report, 68% of marketers admitted they optimized for ROAS only to later find their campaigns were unprofitable once COGS, fees, and refunds were included.

2. ROI: The Bigger Picture of Profitability

Return on Investment (ROI) offers a broader and more accurate perspective. Unlike ROAS, ROI accounts for all associated costs to measure net profit.

ROI = (Revenue - All Costs) / Total Investment

Why ROI is a superior metric for business health:

  • Holistic: It considers ad spend, product costs (COGS), overhead, and transaction fees.
  • Universal: It can measure the efficiency of any investment, not just ads.
  • Standardized: ROI is a well-recognized financial metric that stakeholders and investors understand.

Extended Example: ROAS vs. ROI

Let's look at a campaign's real numbers:

Component Value (USD)
Revenue $10,000
Ad Spend $2,500
COGS $4,000
Other Costs $2,000
Net Profit $1,500
  • ROAS Calculation: $10,000 (Revenue) / $2,500 (Ad Spend) = 400%
  • ROI Calculation: $1,500 (Net Profit) / ($2,500 + $4,000 + $2,000) (Total Costs) = 17.6%

In this case, the 400% ROAS looks great, but the real 17.6% ROI reveals a much different, and more accurate, reality.

3. The Hidden Costs ROAS Ignores

To calculate true ROI, you must account for the expenses that live outside your ad platform dashboard. These often include:

  • Cost of Goods Sold (COGS): The direct cost of producing or sourcing your products.
  • Transaction Fees: Payment processors like Stripe or PayPal typically take ~2-3% of every sale.
  • Returns & Refunds: The e-commerce industry averages a 15–30% return rate, which directly impacts your net revenue.
  • Customer Support: Salaries, outsourced services, and software subscriptions needed to manage customer inquiries.
  • Overhead Costs: Warehousing, rent, insurance, and utilities.

4. From ROAS to LTV:CAC: The Next Level of Analysis

To move beyond campaign-level metrics and understand the long-term health of your business, focus on these two customer-centric metrics:

  • LTV (Customer Lifetime Value): The total profit you can expect to generate from a single customer over the entire duration of their relationship with your brand.
  • CAC (Customer Acquisition Cost): The total cost of acquiring one new customer.

A healthy business model typically has an LTV to CAC ratio of at least 3:1. This means that for every dollar you spend to acquire a customer, you get three dollars back in profit over their lifetime.

According to Bain & Company, acquiring a new customer can be 5–7 times more expensive than retaining an existing one. This makes retention strategies far more powerful for long-term profitability than chasing ROAS alone.

Ready to find your ratio? Use our LTV to CPA Ratio Calculator.

5. Strategies to Improve True Profitability

Instead of just optimizing for a higher ROAS, focus on these key business levers:

  1. Increase Average Order Value (AOV): Implement strategies like product bundles, cross-sells at checkout, and post-purchase upsells.
  2. Lower Customer Acquisition Costs (CAC): Improve your ad targeting, test new creatives, and optimize your landing pages for a higher conversion rate.
  3. Boost Product Margins: Negotiate better rates with suppliers, optimize your shipping and fulfillment process, and reduce waste.
  4. Invest in Retention Marketing: Build a strong email/SMS list, create a loyalty program, and use content to keep your existing customers engaged and coming back.

Conclusion: Focus on Value, Not Vanity

ROAS is an eye-catching number, but it’s only one piece of the puzzle. True, sustainable profitability comes from a deep understanding of all your costs, your product margins, and the long-term value of your customers.

The businesses that win in the long run aren’t the ones chasing flashy ROAS screenshots—they’re the ones who focus on ROI, LTV, and building a resilient financial foundation.

👉 Use our suite of free calculators, from E-commerce Profit to LTV:CAC, to discover your real numbers.