The Prologue of Epic Proportions
You just got off a call with the marketing agency – Yes, the same one that claims to work with and promises to make you the all important six-figure ecommerce business.
“10x ROAS!”
That’s the only piece of information you retain from that call because let’s be fair – it sounds great. You thank the agency representative and hang up. With good vibes emanating from that call, you shift your focus to the P&L statement that the accountant slipped in your inbox while you were busy on the call.
“NET LOSS!”
Now let that sink in. You re-run the numbers by your accountant. There surely has to be a mistake. You pull out a calculator, convinced you’ll catch the error by punching in numbers manually. After an eternity of doing back and forth – NET LOSS!
HOW?
Don’t be surprised, a business can generate a fantastic ROAS and still lose money. In fact, some businesses “scale” themselves into the ground because they become obsessed with ROAS while ignoring the one metric that actually matters.
Profit!
Before you pull out your pitchforks, let me clarify something:
ROAS is not a bad metric. I use it, you should too.
The problem starts when it becomes the only metric you’re looking at. Marketing metrics can be addictive – addictive enough to make you ignore the actual business you’re running.
You end up measuring a fraction of the story – and sometimes, that fraction can be dangerously misleading.
What Is ROAS?
ROAS stands for Return on Ad Spend.
The formula is straightforward:
Revenue ÷ Ad Spend
So, if you’re spending $1,000 on advertising and generate $10,000 in revenue. Your ROAS is
10,000 ÷ 1000 = 10x
In simple terms, every $ spent on advertising generated $10 in revenue. Easy, clean, dangerously incomplete.
Why Everyone Loves ROAS
Because it’s simple – and easier for marketers to get their point across. No more context needed. A 5x ROAS looks better than a 2x ROAS, a 10x ROAS looks better than a 5x ROAS. So a cleaner scoreboard – business owners are happy seeing these numbers and that’s what marketers (Hi marketing agencies with tall claims!) want.
The problem?
Revenue makes for great LinkedIn posts. Profit pays salaries. ROAS, as you might have guessed, knows absolutely nothing about profit. This clearly makes ROAS the….
The Most Dangerous Assumption In Marketing
Higher ROAS = Better Business? Not always true.. Let’s compare 2 ecommerce stores:
Store A
| Metric | Value |
|---|---|
| Revenue | $10,000 |
| Ad Spend | $2,500 |
| ROAS | 4x |
| Gross Margin | 70% |
Store B
| Metric | Value |
|---|---|
| Revenue | $10,000 |
| Ad Spend | $2,500 |
| ROAS | 4x |
| Gross Margin | 25% |
Same revenue, same ad spend, same ROAS – 2 completely different businesses.
Store A generates a Gross profit of $7,000 with profit after ads of $4,500.
Store B generates a Gross profit of $2,500 with profit after ads of $0
One can comfortably scale operations while the other is running in place.
ROAS, however, treats them as equals.
That’s the first problem.
ROAS completely ignores margins!
I specifically called out “Ad Spend” and “Profit after ads” – wondered why?
This is another common problem businesses (specially new businesses) don’t take into account. They get so consumed by the ROAS multiplier and revenue that the only cost they end up accounting for is the cost of goods and/or services – end result?
All seems like a fairy tale – till.. They realize something. The ads they ran, the ones that generated that high flying ROAS multiple. They have to be added to the cost as well.
The Costs ROAS doesn’t care about:
- Shipping
- Packaging
- Payment fees
- Returns
- Agency fees
- Creative production
- Salaries
So then, what do we know? What have we learnt?
Revenue Is Vanity. Profit Pays The Bills.
The Attribution Problem Nobody Talks About
This is the fun part – and what marketing agencies will hate me for calling out (Shhh!)
A customer sees your Meta ad, they don’t click but remember your name. Later that day, they google your brand. Then they make a purchase.
Guess what happens next?
Meta claims a sale – Google claims a sale!
Your ecommerce platform (Shopify?) records one actual order!
Yet, both advertising platforms are celebrating!
One sale, 2 winners!
This is one reason businesses often see fantastic ROAS numbers that don’t fully align with reality and marketing agencies get off easy.
Attribution is messy.. Always has been.. Always will be!
ROAS should never be treated as the absolute truth.
The Return & Refund Problem
Let’s say your ads generated $10,000 in revenue. Fantastic!
Except.. 25% of those orders get returned/refunded.
Your actual revenue becomes $7,500 and suddenly that impressive ROAS starts looking very different.
This is very common if you’re running an apparel brand, a footwear brand or selling fashion accessories, where return rates can be significant.
The ad platform doesn’t always know that the customer eventually asked for a refund.
But your bank account certainly does!
The Discount Trap
This one tends to catch many businesses – when sales slow down (and they do) – someone in the team suggests “Let’s offer 30% off” and there you go.. orders increase, revenue increases, ROAS starts looking great. Everyone celebrates!
Then finance comes knocking…
You pull up the numbers and realize:
Without Discount:
Product Price = $500
Gross Profit = $320
With 30% Discount:
Product Price = $350
Gross Profit = $170
You may have generated more orders, resulting in more revenue – ROAS might even look better.
But notice how profitability dropped from 64% to 48.5% ?
When A Lower ROAS Can Actually Be Better
So we’ve figured that a higher ROAS doesn’t necessarily mean that the business is profitable – Surely, a business with a low ROAS is doing something wrong? Well, not quiet – it sounds strange but hear me out..
A low ROAS is definitely not a good sign UNLESS – you’re a subscription based business. Because that’s when the first order received from this customer is less meaningful compared to the metric I’m about to tell you about.
It’s called the Customer Lifetime Value (CLTV).
Here’s a simplified example:
The cost of a Netflix subscription is around $27. But the keyword being “subscription” – this is not a one-time cost. Say Netflix spends $54 to acquire a new customer (CAC). This would yield a sub-par first month ROAS of 0.5x.
However, because the average subscriber stays for around 25 months, Netflix would end up generating $675 in Lifetime Value (LTV) turning that initial deficit into a massive compounding long-term profitability.
This is why metrics like LTV and CAC often provide a clearer picture than ROAS alone.
The Metrics I Care About More
ROAS belongs on the dashboard – just not at the top.
If I had to choose a handful of metrics to run an ecommerce business, I’d focus on:
Contribution Margin
How much money remains after variable costs.
Gross Margin
How much profit exists before operating expenses.
Net Profit
The scorecard that actually matters
Customer Acquisition Cost (CAC)
How much you’re paying to acquire customers.
Lifetime Value (LTV)
How much those customers are worth over time.
ROAS is useful.
These metrics are essential.
Run The Numbers Yourself
This is exactly why I built the ROAS Calculator.
A high ROAS can be impressive.
But without understanding margins, profitability and customer economics, it’s just a number.
Use the calculator to measure advertising efficiency.
Then take the next step.
Ask yourself:
Is this campaign actually making me money?
Because at the end of the day, you can’t deposit ROAS into your bank account.
You can only deposit profit.
The End Game
The funny thing about ROAS is that it’s rarely the number that gets businesses into trouble.
It’s the decisions made because of that number.
Increase budget.
Offer bigger discounts.
Scale faster.
Hire more people.
Launch more campaigns.
All because the dashboard said things were going well.
Meanwhile, the profit and loss statement was telling a completely different story.
Key Takeaways
- ROAS measures revenue, not profit.
- Two businesses with identical ROAS can have completely different outcomes.
- Gross margins matter just as much as advertising performance.
- Attribution can inflate reported ROAS.
- Returns and refunds reduce actual profitability.
- Subscription businesses often require LTV and CAC analysis.
- ROAS is useful, but it should never be viewed in isolation.
- The goal isn’t maximizing ROAS. The goal is building a profitable business.
