How to Calculate Return on Ad Spend (ROAS) for your Shopify Store
Managing cash flow is a crucial part of running a successful ecommerce business
What Is ROAS and Why It Matters
Marketing and advertising spending can be a significant contributor to your cash flow and overall profit, so it's essential to make informed, data-driven decisions on where to allocate your budget. One useful metric to monitor is your Return on Ad Spend (ROAS).
ROAS measures how much revenue your store earns for every dollar spent on advertising. In simple terms, it’s revenue ÷ ad cost. A high ROAS means your ads are effective (you’re getting more back in sale than you spend). Tracking ROAS helps ecommerce owners decide where to allocate ad budget, you want to spend more on channels with higher ROAS and cut back where ads lose money.
How to Calculate ROAS (Step-by-Step)
Calculating ROAS is straightforward as long as you have the data available. Here are some simple steps you can follow:
- Gather ad-driven revenue. Determine how much sales (revenue) came directly from ads in a period. Use your Shopify analytics or Google Ads reports to find the revenue attributed to each campaign or channel.
- Sum all ad costs. Add up what you spent on those ads (including ad spend, agency fees, etc.). For example, if you spend $500 on Facebook ads and $500 on Google Ads in a month, the total ad spend is $1,000.
- Plug into the ROAS formula: For example, if revenue = $2,000 and ad cost = $1,000, then ROAS = $2,000 / $1,000 = 2.0 (often written as 2× or 200%). This means you earned $2 for every $1 spent on ads.
- Express as ratio or percentage. A ROAS of 3 can be said “3×” or “300% ROAS,” meaning $3 earned per $1 spent. The higher the ratio, the better.
You can also use an online return on ad spend calculator or ROAS calculator. For example, DataFlowed’s free ROAS calculator can break down ad spend by platform. Just Enter your numbers, and it automatically calculates your ROAS.
Setting Your Target ROAS
Once you can calculate ROAS, it’s a good idea to set a target ROAS for your campaigns. A target ROAS is simply the revenue per ad dollar you aim for. First, you should calculate your break-even ROAS, this is 1/(profit margin). For example, if your profit margin is 25%, break-even ROAS = 100/25 = 4.0 (you need $4 revenue per $1 spent just to cover costs). Then add a profit buffer: maybe target 6.0 or 8.0 to ensure profit.
Remember, setting your target too high can restrict traffic and miss opportunities. Start with a realistic target (e.g. your break-even ROAS, then adjust) and watch performance. In PPC bidding strategies, “Target ROAS” means the system will try to hit that revenue-to-cost ratio.
Key Takeaways (Summary)
- ROAS tells you how efficient your ads are (revenue per ad dollar). A ROAS above 1× means your ads are at least covering their cost; higher is better.
- Calculation: ROAS = Revenue from Ads ÷ Ad Spend. Example: $2,000 revenue on $1,000 spent = ROAS 2.0 (200%).
- Tracking: Use data from Shopify, Google Ads, Facebook (Meta) ads and any other advertising platform. Pro tip: DataFlowed can sync all this data to Google Sheets so you can automate the process.
- Target ROAS: Calculate your break-even ROAS from profit margins (e.g. 20% margin needs 5× to break even), then set a realistic target above that. Google Ads’ Target ROAS feature will then optimize bids to meet that goal.
- Tools: Use a return on ad spend calculator or ROAS calculator online for quick results. DataFlowed’s free too and others let you enter your numbers and instantly get ROAS.
By regularly calculating ROAS you’ll know which ads or keywords are most profitable. Adjust budgets toward high-ROAS channels and lower spending on poor performers. With a clear target ROAS and the right tools, you can make data-driven decisions that boost your store's profitability.