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Definition
A ROAS target is the return on ad spend that the team aims for, set above break-even so that the spend also leaves a profit. It is a planning number, and it only means something when the margin and the profit goal behind it are written down.
ROAS target = break-even ROAS x (1 + profit goal as a share of ad spend)Example with made-up numbers: Contribution margin before ad cost is 40 percent, so break-even ROAS = 1 / 0.40 = 2.5. The team wants a profit of 20 percent of ad spend, so ROAS target = 2.5 x 1.2 = 3.0. At a ROAS of 3.0, 100 of spend brings 300 of revenue. That keeps 120 of contribution, and 20 is left after the 100 of spend.
How to use it
A ROAS target starts from the break-even point. Break-even ROAS is the return at which the contribution from sales equals the ad spend. A target above that point leaves part of the spend as profit. The higher the target, the fewer sales the ads can buy, so the target and the budget have to be set together.
Set the target for a specific product group or account, not for a whole store with mixed margins. One target applied to products with different margins pushes spend toward the wrong products. Use platform ROAS for in-platform decisions, and check the result against MER and the real margin each month.
