For years, Return on Ad Spend (ROAS) has been the go-to metric for measuring ad performance in eCommerce. It’s simple: the higher the ROAS, the better your ads are performing—right?
Not exactly.
If you’re only looking at ROAS, you’re missing the bigger picture. ROAS measures how much revenue you generate for every dollar spent on ads, but it doesn’t account for profitability, growth potential, or the true health of your Shopify business.
In reality, scaling an eCommerce brand is about more than just ad efficiency. If you want to build a profitable, sustainable, and scalable business, focusing solely on ROAS could be holding you back.
- In this post, we’ll break down:
- What ROAS really means (and how to calculate it)
- The hidden problems with ROAS that most Shopify store owners overlook
- Why a high ROAS isn’t always a good thing
- A better metric to track for long-term profitability and growth
💡 What is ROAS and how to calculate it?
ROAS stands for Return on Ad Spend, and it’s calculated using the following formula:
For example:
- You spend $1,000 on Meta Ads.
- Those ads generate $3,000 in revenue.
- Your ROAS is 3X (or 300%).
On paper, that looks great. But here’s the problem—ROAS only tells you how much revenue was generated, not how much profit you actually made.
🚨The Problems with ROAS as a North Star Metric
1. ROAS Ignores Your True Costs
ROAS doesn’t account for your real business expenses beyond ad spend, such as:
- Cost of Goods Sold (COGS) – What it costs to produce or source your product.
- Shipping & Fulfillment – Carrier fees, packaging, and 3PL costs.
- Transaction Fees – Shopify Payments, PayPal, Klarna, etc.
- Discounts & Promotions – Free shipping, welcome discounts, or seasonal sales.
- Customer Returns – Refunds that eat into your revenue.
Example of why ROAS doesn’t equal Profit
| Metric | Value |
|---|---|
| Ad Spend | $1,000 |
| Revenue Generated | $3,000 |
| ROAS | 3X |
| Cost of Goods Sold (COGS) | $1,200 |
| Shipping & Fulfillment | $300 |
| Transaction Fees | $100 |
| Discounts & Returns | $200 |
| Total Costs (Excluding Ad Spend) | $1,800 |
| Profit Before Ads | $1,200 ($3,000 – $1,800) |
| Net Profit After Ads | $200 ($1,200 – $1,000) |
Despite a 3X ROAS, this campaign only made $200 in actual profit—a slim margin. If costs were slightly higher, this campaign could be unprofitable.
2. A “Good” ROAS Varies by Business
A 3X ROAS might be profitable for one brand but not another.
- A high-margin business (e.g., digital products) might break even at 1.5X ROAS.
- A low-margin business (e.g., high-cost physical goods) might need 4X ROAS just to avoid losing money.
Want to know your breakeven ROAS? Use this ROAS Calculator to find the ROAS you need to stay profitable.
3. A High ROAS Can mean missed opportunities
Many brands hesitate to scale ad spend because they fear lowering their ROAS. But sometimes, a lower ROAS at higher spend is more profitable.
Let’s compare two strategies:
| Scenario | ROAS | Revenue | Ad Spend | Gross Profit After Marketing (Contribution Margin) |
|---|---|---|---|---|
| High ROAS Strategy | 4X | $40,000 | $10,000 | $5,000 |
| Scaled Spend Strategy | 2.5X | $125,000 | $50,000 | $15,000 |
Even though the 2.5X ROAS is lower, this business earns 3X more profit by increasing ad spend.
🔑 Don’t just chase a high ROAS—chase real profit.
4. ROAS Has Major Attribution Issues
ROAS is only as reliable as the data behind it. But digital ad platforms often inflate reported revenue:
- Google Ads and Meta Ads may both take credit for the same sale.
- Shopify’s revenue data is often lower than what ad platforms report.
- iOS privacy updates (like ATT) have made tracking even less reliable.
5. ROAS doesn’t measure real business growth
Even if you have a high ROAS, it doesn’t mean your business is growing profitably. True growth = increasing profitability, not just efficiency.
If your ads generate revenue but your overall business expenses (rent, staff, inventory, etc.) eat into profits, ROAS won’t help you see the full picture.
This is why businesses need a better metric.
A Better Metric: Contribution Margin
Instead of optimizing for ROAS, eCommerce brands should focus on Contribution Margin (CM)—a profitability-driven metric.
Contribution Margin=Revenue−COGS−Variable Costs−Marketing Cost
Why is CM better than ROAS?
✅ It includes ALL variable costs (not just ad spend).
✅ It ensures your business is actually profitable, not just breaking even.
✅ It helps you scale effectively, knowing that growth = profit.
Want to calculate your real profitability? Use this Contribution Margin Calculator.
So next time you check your ROAS, ask yourself:
“Am I actually making money?”
The real key to growth isn’t just spending efficiently—it’s scaling profitably
