ROI vs ROAS: Why the Metric You Track Changes Everything

Ask any agency about their results and they'll throw a ROAS number at you. "We're getting 5x ROAS!" Sounds great, right? Not necessarily.

The ROAS Illusion

ROAS (Return on Ad Spend) is simple: revenue divided by ad spend. If you spend $1,000 and generate $5,000 in revenue, you have a 5x ROAS.

But here's what ROAS doesn't tell you:

• What's your margin? If you're selling a $100 product with $30 COGS, your actual profit is very different from the revenue number
• What about other costs? Shipping, returns, payment processing, agency fees — none of this shows up in ROAS
• Is the revenue incremental? Would some of those sales have happened anyway?

The ROI Reality

ROI (Return on Investment) accounts for the full picture:

ROI = (Profit from ads - Total ad costs) / Total ad costs

Where profit means actual margin after COGS, shipping, returns, and fees.

Let's compare two scenarios:

Brand A: "Amazing" ROAS

• Ad spend: $10,000
• Revenue: $50,000 (5x ROAS!)
• COGS: $20,000
• Shipping: $5,000
• Returns: $5,000
• Agency fee: $2,000
• Actual profit: $8,000
• Real ROI: -20% (they lost money)

Brand B: "Modest" ROAS

• Ad spend: $10,000
• Revenue: $35,000 (3.5x ROAS)
• COGS: $7,000
• Shipping: $2,000
• Returns: $1,000
• Agency fee: $2,000
• Actual profit: $13,000
• Real ROI: 30% (they made money)

Brand B has worse ROAS but is actually profitable. Brand A looks great on reports but is bleeding cash.

Why Agencies Love ROAS

Simple: ROAS is always a bigger, more impressive number. "5x ROAS" sounds better than "30% ROI" in a client report. And because ROAS uses top-line revenue, it's almost always positive — even when the business is losing money on ads.

We're not saying ROAS is useless. It's a fine directional metric for day-to-day optimization. But it should never be the metric you use to evaluate whether advertising is working for your business.

How We Track ROI

For every client, we build a custom P&L model that includes:

1. Revenue attributed to ads (with proper attribution)
2. COGS for products sold through ads
3. Variable costs (shipping, processing, returns)
4. Ad spend including platform costs
5. Agency fees — yes, we include our own cost

This gives us a true profit-per-customer metric that tells us exactly how much each ad dollar returns in actual business profit.

The Strategy Shift

When you optimize for ROI instead of ROAS, your strategy changes:

• You focus on high-margin products, not just best sellers
• You factor in customer lifetime value, not just first purchase
• You invest in brand because it reduces long-term acquisition costs
• You say no to campaigns that look good on paper but don't drive profit

Our Commitment

We report both metrics to our clients. But when we make optimization decisions, we optimize for what actually matters: putting more money in your bank account than you spend on advertising.

That's the ROIlabs difference.

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Want to know your true ROI on ad spend? Get a free profitability audit and we'll calculate the number that actually matters.