If you have spent any time reading about Google Ads, you will have come across ROAS. It gets mentioned a lot, often in very confident terms: "we achieved a 10x ROAS" or "anything below 4x is not worth running." But what does it actually mean for your business, and should you be using it to judge your campaigns?
What ROAS actually means
ROAS stands for Return on Ad Spend. It is a simple ratio: revenue generated divided by the amount spent on advertising.
If you spend £1,000 on Google Ads and those ads generate £5,000 in revenue, your ROAS is 5x (or 500 percent). For every £1 you put in, you got £5 back.
Simple enough. But here is where the nuance starts.
Why "good ROAS" varies so much by business
ROAS says nothing about profit. It measures revenue, not margin. And margins vary enormously across different businesses and sectors.
Take two businesses, both with a ROAS of 4x:
Business A is an ecommerce retailer selling kitchenware. Their average order value is £80 and their gross margin is 30 percent. That means they make £24 profit per order before any other costs. With a 4x ROAS, they are generating £4 of revenue per £1 of ad spend. If their cost of sale is 25 percent of revenue (1 divided by 4), and their margin is 30 percent, they are making a small profit but not a healthy one. At a 4x ROAS, this business is barely breaking even on their ads once overheads are factored in.
Business B is a specialist joinery company in Cheltenham. They sell bespoke fitted furniture with a gross margin of 65 percent. An average project is worth £6,000. A 4x ROAS means they are generating £4 of revenue for every £1 spent. But because their margin is so high, they are making a strong return even at what might seem like an average ROAS.
Same number. Very different commercial outcomes.
What realistic ROAS looks like for local service businesses
For local service businesses, ROAS is actually not always the most useful metric. Here is why.
If someone calls your business from a Google Ad and books a job, that revenue is often tracked offline. The conversion might be logged as a phone call or a form submission. You might not have a clean revenue number to divide by your ad spend.
In these cases, a more useful metric is cost per lead (CPL). How much does it cost you to get an enquiry? If you know your close rate (say, one in four enquiries becomes a customer) and your average job value (say, £1,500), you can work out the maximum you can afford to spend per lead before the maths stops working.
In this example: 25 percent close rate, £1,500 average job value, 50 percent gross margin. Each customer generates £750 in gross profit. If you need to acquire four leads to get one customer, you can afford to spend up to £750 on those four leads, or £187.50 per lead, and still break even. In practice you would want to be well below that to make a decent return.
Why chasing a high ROAS can hurt you
This sounds counterintuitive. Surely a higher ROAS is always better?
Not necessarily. When Google Ads uses Target ROAS as a bidding strategy, the system optimises specifically for that target. If you set an unrealistically high ROAS target, Google will restrict your ad delivery to only the situations it believes will hit that target. In practice, this often means dramatically reduced impressions, fewer clicks and, paradoxically, less total revenue despite the high ROAS percentage.
We see this regularly when auditing accounts. A business has set a Target ROAS of 800 percent because someone told them that was a good number. Their actual ROAS is 900 percent. Sounds great. But they are only spending £300 per month when their budget allows for £2,000, because Google is being so cautious about hitting the target that it is barely entering the auction. They could be generating five times the revenue at a slightly lower ROAS.
The goal is not to maximise ROAS. The goal is to maximise profitable revenue within your budget.
How to set a ROAS target that makes sense
Start with your numbers.
Work out your gross margin percentage. Let us say it is 40 percent. For your ads to generate a positive return, your ROAS needs to be above 1 divided by 0.4, which is 2.5x. Below a 2.5x ROAS and you are losing money on every sale.
That is your break-even ROAS. Your target ROAS should be comfortably above this to generate real profit, but not so high that it restricts the volume of sales you are making.
For most ecommerce businesses with margins between 30 and 50 percent, a healthy target ROAS falls in the 3x to 6x range. For service businesses with higher margins and lower volume, the maths looks different.
The most important thing is to base your targets on your own business economics, not on benchmarks you read online. A 4x ROAS might be excellent for one business and disastrous for another.
If you are unsure whether your Google Ads campaigns are generating a real return, request a free account audit. We will review your numbers honestly and tell you what we find.