What Is ROAS and How Do You Calculate the Right Target ROAS?
ROAS sounds complicated.
It isn't.
Let's sell a laptop.
1. What is ROAS?
You sell a laptop for $1,000.
Google Ads costs you $100 to generate the sale.
Revenue: $1,000
Google Ads: $100
Your ROAS is:
$1,000 ÷ $100 = 10.0
For every $1 spent on Google Ads, you generated $10 in sales.
That's ROAS. Return On Ad Spend. The $1,000 Return you are getting On $100 of Ad Spend.
But did you make money?
2. Is a 10.0 ROAS profitable?
Let's add the costs.
Selling price: $1,000
Purchase price: $650
Shipping: $20
Payment fees: $20
Google Ads: $100
What's left?
$1,000 - $650 - $20 - $20 - $100 = $210
You have $210 left from a $1,000 sale.
That's a 21% CM2 margin (the margin left after buying and shipping the goods and paying payment fees and Google Ads).
Great.
But here's the important question:
3. How much CM2 do you actually need?
There is no magic percentage that works for every business.
So start with a benchmark.
Research normal CM2 or contribution margins for your type of ecommerce business. Ask your accountant, look at industry benchmarks, or simply ask an AI tool:
"What is a healthy CM2 margin for an ecommerce business selling consumer electronics?"
As a practical starting point, you might find something like:
Below 10%: Risky
10 to 15%: Acceptable, but tight
15 to 20%: Healthy
Above 20%: Very healthy
Then compare that with your own historical numbers, overhead and the profit you want your business to make.
For our imaginary electronics webshop, let's use:
Minimum CM2: 18%
Our rule is simple:
We don't want to sell a product if the sale leaves us with less than 18% CM2.
4. What will customers actually pay?
The market matters too.
Look at comparable laptops.
$1,200? Too expensive.
$800? Too cheap.
$1,000? That's the sweet spot.
So:
Realistic selling price: $1,000
Now we know three crucial numbers:
Purchase price: $650
Realistic selling price: $1,000
Minimum CM2: 18%
Now we can calculate what Google is allowed to spend.
5. Calculate the minimum money you want to keep
18% of $1,000 is:
$1,000 × 18% = $180
After buying and shipping the laptop, paying the payment fees and paying Google Ads, we want at least:
$180 left.
Now work backwards:
Selling price: $1,000
Purchase price: $650
Shipping: $20
Payment fees: $20
Minimum CM2 we want to keep: $180
What's left?
$130
That's what we can afford to spend on Google Ads to generate the sale.
6. Now calculate your Target ROAS
We want Google to generate:
$1,000 revenue
Google may spend:
$130
So:
$1,000 ÷ $130 = 7.69
Our Target ROAS is approximately:
7.7 or 770%
That's it.
We didn't guess 7.7.
Google didn't decide it for us.
We calculated it from the economics of the sale.
Google was originally generating the sale for $100, giving us a ROAS of 10.0.
That's fantastic.
But we've now calculated that Google can spend up to $130 and we'll still achieve our required 18% CM2 margin.
So we don't necessarily need a Target ROAS of 10.0.
Our business economics tell us that 7.7 is enough.
7. But what if you sell thousands of products?
This was just one laptop.
But what if your webshop sells thousands of products with different purchase prices, selling prices, shipping costs, payment costs and margins?
That's where it gets more complicated.
Need help finding your Target ROAS?
At Wolf & Bär, we help ecommerce businesses calculate the Target ROAS they actually need to grow profitably.
Whether you sell a handful of products or thousands, we can help you find the number that works for your business.
Book your free ROAS Check with Wolf & Bär.
We'll answer one simple question:
Is the Target ROAS you're giving Google actually the right one for your business?