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- Return on ad spend (ROAS) measures revenue generated per dollar spent on advertising, a critical metric for SaaS leaders and CFOs to evaluate marketing efficiency and guide budget allocation decisions. While the basic formula is revenue divided by ad spend, SaaS companies must account for customer lifetime value and recurring revenue patterns in their calculations.
- For SaaS businesses, ‘good’ ROAS varies by company stage and business model.
- Unlike metrics like CTR or conversion rates, ROAS directly connects advertising spend to revenue generation, making it particularly valuable for financial planning. It helps CFOs transform marketing spend from a discretionary expense into a predictable revenue driver by providing clear ROI parameters.
- Major challenges in optimizing ROAS include balancing short-term efficiency with long-term value, accurate attribution across complex customer journeys, and maintaining data quality across multiple systems. Success requires a holistic approach that considers both immediate performance metrics and long-term customer value.
- Key strategies for improving ROAS include establishing clear benchmarks, implementing systematic testing, optimizing the full conversion funnel, and leveraging predictive analytics. Regular monitoring across different time horizons (30, 60, 90 days) helps account for the full customer lifecycle impact in SaaS businesses.
For SaaS companies, return on ad spend (ROAS) is a critical metric for evaluating advertising efficiency across long-term customer relationships. It helps finance leaders optimize marketing investments and better predict revenue impact from ad campaigns. However, calculating ROAS in SaaS is more complex than in other types of businesses because the calculations must account for recurring revenue streams, customer lifetime value, and varying sales cycles across different customer segments.
Return on ad spend (ROAS) measures the revenue generated per dollar spent on advertising, expressed as a ratio of revenue to ad spend.
This guide will show you how to calculate ROAS and provide strategies to help you optimize it for faster growth.
Table of Contents
Understanding the ROAS metric for SaaS businesses
In the simplest terms, ROAS is the amount of revenue earned for every dollar you spend on advertising. Think of it as measuring the ROI of money spent on advertising.
However, it’s not as straightforward as it sounds, especially in the SaaS context. Unlike, let’s say, traditional e-commerce, where ROAS calculations are based on one-time purchases, SaaS businesses operate on a subscription model, thereby generating recurring revenue.
In fact, for SaaS companies, ROAS analysis can be conducted at multiple levels. At the macro level, one can potentially evaluate the overall marketing budget’s performance, providing a bird’s-eye view of advertising efficiency.
However, the real power of ROAS lies in trying to get as granular as possible, analyzing individual campaigns, channels, or even specific targeting strategies. This enables you to more precisely optimize your advertising strategy.
It’s important to take into account a couple of considerations that are unique to SaaS businesses. One is that the time horizon for measuring returns is more complex.
While your typical e-commerce business might measure ROAS based on immediate purchase value, SaaS companies, which operate on a subscription model, must account for the full customer lifetime value (LTV). A customer acquired through advertising might start with a small monthly subscription but continue paying for years, hopefully going on to subscribe to more products from you. The typical upsell and cross-sell scenarios in SaaS can have a significant impact on the ‘true’ ROAS.
You also have to consider that LTV often varies across the different customer segments in your business, which can further complicate ROAS calculations. For example, enterprise customers might have higher acquisition costs but also generate substantially more revenue over time compared to small PLG customers.
Another important consideration is the customer journey. The sales cycle in SaaS typically involves multiple touchpoints across different channels, especially when the target accounts are mid-market or enterprise (even PLG in some cases).
A potential customer might first encounter your brand through a LinkedIn reach-out or ad, engage with your content (e-books, case studies, blogs, podcasts, etc.), and finally convert (maybe) through a retargeting campaign. This multi-touch journey complicates attribution.
Understanding these nuances is crucial for CFOs as they inform not just how to calculate ROAS but, more importantly, how to interpret and act on these measurements to optimize advertising investments.
Learn more about SaaS metrics here
ROAS vs. ROI
People often confuse ROAS and ROI. While both are profitability metrics, that’s pretty much where the similarity ends. They really serve very different purposes in evaluating advertising effectiveness, especially for SaaS businesses.
ROAS provides a more focused view of advertising efficiency by measuring gross revenue generated directly from advertising investments. It’s a top-line metric that helps answer the burning question, “How effective is this advertising channel or campaign at generating revenue?”
ROI takes a broader view by considering the total profitability of your advertising efforts, which includes a host of associated costs like advertising spend, agency fees (if applicable), creative production costs (if applicable), marketing team salaries, tool and platform subscriptions, customer support costs, sales team costs involved in conversion, etc.
From a CFO’s/decision makers’ lens, ROAS and ROI can serve complementary purposes because ROAS is ideal for quick, tactical campaign decisions, while ROI better serves long-term strategic planning.
For SaaS companies, both metrics must be adapted to account for recurring revenue streams, customer lifetime value, customer acquisition costs (CAC), and churn rates. CFOs should consider them alongside key SaaS metrics like CAC payback period and LTV:CAC ratio to build a balanced approach.
ROAS vs. target ROAS
Target ROAS (aka t-ROAS) is the desired return on ad spend. It is the revenue benchmark you aim to achieve for each advertising dollar invested.
While actual ROAS measures real performance, target ROAS functions as both a strategic goal and an automated bidding mechanism, particularly in platforms like Google Ads.
Using your actual ROAS can be a good place to start when determining your target ROAS. There are also a few other things to keep in mind:
- Company stage: Early-stage companies might accept a lower ROAS as they prioritize growth, while well-established enterprises should aim for a higher ROAS.
- Risk appetite and financial priorities: Your risk appetite, risk profile, and financial resources influence your ROAS targets. The decision to chase aggressive growth or prioritize sustainable growth also plays a key role.
- Comparison to other channels: It is important to compare your ROAS to the ROI of other channels (blogs, podcasts, PR, etc) to understand where your marketing efforts are most effective. For example, a higher target ROAS may be more appropriate for an intent-based search ad vs. an awareness campaign.
- Customer segments: Consider your LTV, too. For example, some types of clients or businesses might justify lower targets due to higher LTV they typically provide. Or vice versa.
- Overall market size and demand: Aggressive advertising and marketing are justified in a ‘blue ocean’ market with high demand. You might need to think more deeply about ‘red ocean’ markets. In these markets, it might make more sense to (at least initially) pick a sliver of the market where your business is strong and target that. Then you can expand from there.
You can even think about a dynamic approach to target ROAS, which incorporates seasonal, competitive, and segment-specific multipliers and allows for adaptive bidding strategies that reflect market conditions.
Success requires careful monitoring of key metrics like conversion trends (e.g., traffic-to-lead conversion on your website) as well as your CAC. It’s also important to monitor engagement metrics across multiple intervals (30-60-90 or more days) to account for the full customer sales lifecycle.
What is a good ROAS?
Defining a ‘good’ return on ad spend is complex and depends on various factors, and there’s no one-size-fits-all answer.
While you can find benchmarks out there for SaaS businesses, keep in mind that they may not be very reliable. This is because ROAS is something that most SaaS companies like to keep close to the vest, meaning they don’t like to share what they’re spending on ads or the revenue they’re generating from them.
Any Saas-specific ROAS benchmarks you do find should be viewed with caution and thoroughly evaluated to determine their reliability before you use them to make any decisions.
While benchmarking can be incredibly powerful for driving growth in SaaS, using inaccurate ROAS benchmarks in your decision-making can negatively impact your advertising efforts, reducing the lead generation you get from them and ultimately your sales.
If you still want a number to benchmark against, you could use Google’s estimate, which is that the average ROAS for business buying ads on its platform is 2:1. However, that number is based on a study conducted by Google’s chief economist back in 2009. So, it’s probably not particularly reliable either given all the changes in the SaaS market in the 15+ years since, especially in terms of how competitive the market has become.
How to calculate ROAS?
The fundamental formula for calculating return on ad spend (ROAS) is pretty straightforward:
For example, let’s say you spent $1,000 on ads and managed to generate $5,000 in revenue; your ROAS would be 5:1, meaning you earned $5 for every dollar spent on advertising.
However, for SaaS businesses, calculating ROAS (you guessed it right) isn’t that simple.
Your revenue calculation should include not just the initial subscription value but also the expected LTV of the customer. For instance, let’s say that a customer acquired through a $2,000 ad campaign pays $500 monthly and typically stays for two years (24 months); their total revenue contribution would be $12,000, resulting in a ROAS of 6:1. This calculation becomes even more nuanced when you factor in potential expansion revenue through upsells or plan upgrades.
To determine an appropriate ad spend and ROAS target, consider using this method:
- Determine customer acquisition targets: Start with the number of customers you want to acquire from marketing efforts.
- Calculate required leads: Work backwards through your funnel, using conversion rates to determine the number of leads, MQLs, and SQLs needed to achieve your customer acquisition target.
- Assess historical cost per lead: Determine your historical cost per lead (CPL) from various advertising channels. Then, calculate your blended cost per lead.
- Calculate ad spend: Multiply the number of leads needed by the cost per lead to determine your required ad spend.
- Estimate ARR and ROAS: Calculate your expected new annual recurring revenue (ARR) based on your average revenue per account (ARPA) and the number of new customers. Then, calculate your ROAS by dividing the new ARR by the ad spend.
- Adjust based on priorities: As highlighted above, depending on your company’s stage, financial resources, and growth priorities, adjust your ad spend and customer acquisition targets accordingly. You can increase ad spend if your ROAS remains strong.
If your sales cycle is several months long, you need to run campaigns for an extended period to accurately assess ROAS. We’ll illustrate this with an example in the next section.
For the most accurate ROAS measurement, consider tracking it across different time horizons. Start from 30 days (for immediate campaign performance), six months (for medium-term impact), and go all the way to lifetime value for long-term effectiveness.
This multi-layered approach will help you understand the ‘true’ return on your advertising investments and make budget allocation decisions more precise.
Significance of ROAS for SaaS business leaders
For SaaS CFOs, finance teams, and leaders, ROAS serves as a crucial decision-making tool that acts as a bridge between marketing activities and financial outcomes. While metrics like clickthrough rates (CTR) or conversion rates that offer insights into campaign performance, ROAS provides a direct link between advertising investments and revenue generation, making it particularly valuable for strategic financial planning.
An important perspective to remember is that ad spend is often treated as discretionary and fungible, which can be frustrating for business leaders.
Marketing teams may sometimes overspend, leading to budget overruns which create ripple effects in the business. Also, in the SaaS marketing arsenal, ads are just one of many channels, such as webinars, email campaigns, SEO, and content. Therefore, ROAS helps finance and marketing leaders determine where they must put their efforts so as to get the best returns.
How to create a budget for ad spend
Let's use the following example to illustrate how you might create a budget for ad spend:
Starting with a target of 100 new customers, we can work backwards through the conversion funnel to determine the required marketing investment.
Given the conversion rates (50% from SQL to Closed-Won, 40% from MQL to SQL, and 25% from Lead to MQL), we calculate that 2,000 initial leads are needed to achieve our customer goal. With a historical cost per lead of $200, this translates to a required ad spend of $400,000.
To calculate the expected return, we look at the average revenue per account (ARPA) of $20,000. With 100 new customers, this would generate $2,000,000 in new annual recurring revenue (ARR). Dividing this by our ad spend of $400,000 gives us a ROAS of 5:1, indicating healthy unit economics.
With such strong performance metrics, the company could consider increasing ad spend to drive additional growth, provided that conversion rates remain stable, market demand exists for expansion, and the company has the operational capacity to support more customers.
Using this calculation, finance leaders can also determine:
- Optimal budget: Instead of viewing ad spend as purely discretionary, ROAS helps establish clear ROI parameters. In the example, achieving a 5:1 ROAS justifies the $400,000 ad spend since it efficiently converts to $2 million in ARR.
- Channel effectiveness: By tracking ROAS across different marketing channels (ads, webinars, email campaigns, blogs), leaders can make data-driven decisions about budget allocation. With the given conversion metrics (Lead to MQL (25%), MQL to SQL (40%), SQL to Closed Won (50%)), leaders can identify bottlenecks and optimize spending to ‘add fuel’ to the most effective channels.
- Growth planning: The relationship between ad spend, customer acquisition costs ($20,000 ARPA in this case), and resulting revenue helps finance leaders model different growth scenarios. They can work backwards from desired customer counts to determine required ad budgets while maintaining profitable unit economics.
A final point to remember is that determining the ad spend budget also depends on factors such as the company’s stage, growth priorities, and available funds.
Common challenges in maximizing ROAS
For SaaS businesses, several challenges can make it harder to effectively optimize ROAS:
- Short-term focus vs. long-term value: Many companies prioritize immediate returns over long-term value. This is particularly challenging in SaaS where customer lifetime value takes months to materialize. This ‘myopic’ approach often leads to undervaluing campaigns that might possibly bring in high-quality, long-term customers.
- Narrow targeting limitations: Excessive focus on high-performing segments can lead to market saturation and missed opportunities. While targeting proven customer segments is important, overly narrow targeting can limit growth potential and increase acquisition costs as you compete for the same limited audience.
- Budget micromanagement: Excessive focus on day-to-day ROAS metrics can lead to over-optimization and constant budget adjustments. This can prevent campaigns from gathering enough data to make meaningful optimizations and disrupt the learning phase of advertising algorithms.
- Data and attribution challenges: Customer journeys in SaaS are complex and happen across multiple touchpoints making accurate attribution difficult. Data quality issues compound this, as measuring ROAS requires integrating data from multiple sources like ad platforms, CRM systems, billing systems, and customer success tools. Data integration issues and inconsistencies in data quality can lead to incorrect ROAS calculations and misguided optimization efforts.
- Balancing growth and efficiency: SaaS companies often struggle between pursuing aggressive growth and maintaining efficient ROAS. While high ROAS targets might look good on paper, they can sometimes restrict growth opportunities, especially in competitive markets where customer acquisition costs are rising.
- Platform dynamics: Constant changes in advertising platforms’ algorithms and features require continuous adaptation of strategies. This is particularly challenging for SaaS businesses that need to maintain consistent lead quality while adapting to these changes.
- Customer segment variation: Different customer segments (enterprise vs. SMB) often show varying ROAS patterns. Managing campaigns and budgets to optimize ROAS across diverse customer segments, each with different acquisition costs and lifetime values, adds complexity to optimization efforts.
- Creative stagnation: The pressure to maintain consistent ROAS can lead to risk-averse advertising strategies. Teams might stick to ‘safe’ creative approaches that show reliable returns rather than testing innovative campaigns that could potentially deliver better results.
11 tips and best practices to improve your ROAS
1. Establish clear targets
As already highlighted, it is important to start by setting realistic ROAS targets based on your SaaS company’s stage and industry position.
This involves analyzing historical performance data across different channels and customer segments and then establishing baseline metrics that can guide optimization efforts.
For early-stage companies, ROAS targets might focus on customer acquisition velocity, while mature companies might prioritize efficiency metrics.
2. Implement systematic testing
It’s a good idea to develop a structured approach to testing that will cover all aspects of your advertising efforts. This means regularly testing everything from ad creatives, copy variations, and audience segments to bidding strategies.
Document all test results and insights meticulously, allowing successful approaches to be scaled across campaigns while learning from less successful experiments.
3. Optimize the full conversion funnel
Look beyond just the ad performance to optimize every step of the conversion journey.
This means creating highly relevant landing pages, streamlining the signup process, implementing effective lead-scoring mechanisms, and optimizing your demo scheduling flow.
Each touchpoint must be thoughtfully designed to maximize conversion probability while maintaining lead quality.
4. Reduce acquisition costs
It probably goes without saying (but always bears repeating) that it’s critical to identify and focus on strategic approaches to lower your cost per acquisition without sacrificing lead quality.
This includes improving your quality scores across advertising platforms, implementing smart bidding strategies, and optimizing ad scheduling based on performance data. Pro tip: Pay special attention to creating and targeting ‘lookalike’ audiences based on your highest-value customers.
5. Deep understanding of the audience
Invest time in developing comprehensive ideal customer profiles based on your most successful current customers. Analyze their journey patterns, behavioral characteristics, and engagement signals that indicate high conversion potential to refine your targeting and messaging strategies.
6. Focus on customer retention and expansion
Retargeting is a must for SaaS companies, so don’t limit your ROAS optimization to just new customer acquisition.
Retargeting strategies for existing customers can focus on opportunities for upselling and expansion. You can even develop targeted campaigns for different customer segments based on their usage patterns and potential for growth.
Additionally, implement win-back campaigns for churned customers using insights from their past engagement patterns.
7. Advanced bidding strategies
Take a sophisticated approach to bid management by implementing portfolio bidding across your campaigns. This means adjusting bids based on both immediate conversion potential and predicted customer lifetime value.
Consider factors like time of day performance, seasonal trends, and competitive dynamics when setting your bidding strategies. Balance aggressive bidding in high-performing segments with conservative approaches in experimental areas.
8. Systematically combat ad fraud
It is imperative to implement a well-thought-out ad fraud detection and prevention strategy to protect your ROAS performance.
This starts with establishing baseline metrics for normal campaign behavior, including typical click-through rates, conversion patterns, and user engagement signals.
Deploy fraud detection tools that can identify suspicious patterns like click farms, bot traffic, or IP-based fraud. Regularly audit your traffic sources, paying special attention to outliers in performance metrics, unusual geographic patterns, or sudden spikes in low-quality traffic.
When fraud is detected, take immediate action by blacklisting suspicious IPs, adjusting targeting parameters, and reallocating budget to verified high-quality traffic sources.
9. Leverage predictive analytics
Use data-driven forecasting to optimize your advertising investments. This involves implementing models that predict customer lifetime value, identify churn risks, and score leads based on their likelihood to convert.
These predictions will help you make proactive decisions about budget allocation and targeting strategies.
10. Maintain a holistic view
Consider your ROAS metrics within the broader context of your SaaS business model.
This means accounting for factors like sales cycle length, customer support costs, and potential expansion revenue when evaluating campaign performance so that you understand the full impact of your advertising investments on long-term business growth.
11. Ensure data quality
Establish robust systems for maintaining data integrity across your advertising efforts.
This includes implementing fraud detection measures, regular auditing of tracking systems, and maintaining clean, consistent data across all platforms. You must pay special attention to proper attribution setup and regular validation of conversion tracking.
The easiest path to mastering ROAS
Given the complexity of SaaS business models with their recurring revenue streams and varied customer lifecycles, ROAS optimization is both challenging yet essential.
Gone are the days of manual Excel-based calculations and disconnected data sources. The right technology can transform how companies track and optimize ROAS. Modern financial planning and analysis (FP&A) platforms can make this easier, especially those built with the complexities inherent in SaaS businesses in mind.
That would be Drivetrain—a comprehensive FP&A software designed to address those complexities and the challenges they create for SaaS CFOs and other business leaders.
With 800+ integrations, Drivetrain helps companies track ROAS effectively through comprehensive analysis across different customer segments and channels. In addition to making the data you need to connect your marketing efforts to the bigger financial picture instantly accessible, Drivetrain offers an integrated approach to ROAS management, providing real-time insights and predictive analytics that enable proactive decision-making.
With Drivetrain’s advanced analytics, you can identify optimization opportunities. The platform also enables accurate revenue forecasting from advertising investments, monitors key conversion metrics throughout the customer journey, and helps with ‘what-if’ scenarios to make determining optimal ad spend easier.
Explore how Drivetrain can help you track all your marketing metrics and connect them to your business goals.
FAQs
ROAS stands for "return on ad spend." ROAS is the amount of revenue earned for every dollar spent on advertising.
Click-through rate (CTR) measures the percentage of people who click on your ad after seeing it. ROAS measures actual revenue generated from ad spend. CTR is an engagement metric, while ROAS is a revenue metric that directly shows return on investment.
SaaS companies should track ROAS across multiple time horizons, from daily monitoring for campaign-level adjustments and monthly analysis for tactical optimization to quarterly reviews for strategic planning. However, given the longer sales cycles in SaaS, it’s essential to allow enough time before making significant strategic changes based on ROAS data.
For SaaS businesses, a ‘good’ ROAS is subjective and varies by company stage and model. Generally, a 4:1 ratio ($4 revenue for every $1 spent) is considered acceptable, while 5:1 or higher is very good. But we’d say take any benchmark with a pinch of salt. Enterprise SaaS might accept lower initial ROAS due to higher lifetime values.
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