How to measure marketing ROI: ROAS, CPA, CAC and lifetime value explained

Marketing is making money when the profit from the customers it brings in is more than it costs to win them. Four numbers tell you whether that is happening: return on ad spend, cost per acquisition, customer acquisition cost and customer lifetime value. You need to know all four, and you need targets for them that come from your own margins.

Return on ad spend (ROAS)

What it is: revenue generated for every pound spent on ads.

How to calculate it: revenue from ads ÷ ad spend.

If you spend £1,000 and it produces £5,000 in sales, your ROAS is 5, often written as 500% or 5:1.

The catch: ROAS uses revenue, not profit. A ROAS of 5 is excellent on a product with a 60% margin and a loss on a product with a 15% margin once you include other costs.

Set your target from your margin. Your break-even ROAS is 1 ÷ your margin. With a 40% gross margin, break-even ROAS is 2.5. Anything below that loses money on the first sale. Your target should sit comfortably above break-even to cover other costs and leave profit.

Cost per acquisition (CPA)

What it is: what you pay in advertising for one conversion, usually a sale or a lead.

How to calculate it: ad spend ÷ number of conversions.

CPA is the main measure for lead generation. Spend £1,200 for 40 enquiries and your cost per lead is £30.

The catch: a cheap lead isn't a good lead if it never becomes a customer. Track what happens to leads after they arrive so you can work out the cost per customer, not just the cost per enquiry.

Customer acquisition cost (CAC)

What it is: the full cost of winning a new customer, not just the ad spend.

How to calculate it: total sales and marketing cost ÷ number of new customers.

Include ad spend, agency or staff costs, software and any discounts given to win the sale. CAC is usually higher than CPA, and it is the more honest number.

Customer lifetime value (LTV)

What it is: the total profit you expect from a customer over the time they stay with you.

How to calculate it (simple version): average profit per order × average number of orders per customer.

If customers buy several times, or pay monthly, you can afford a higher acquisition cost than a single order would suggest. Base this on real repeat purchase data, not hope.

Putting them together

The relationship that matters most is LTV compared with CAC. If a customer is worth £600 in profit over time and costs £150 to win, the marketing is working and you can probably afford to spend more. If they are worth £200 and cost £180, there is little room for error.

Why your numbers might be wrong

These numbers are only as good as the data behind them. Common problems:

• Conversion tracking that misses or double counts sales.
• Ad platforms each claiming credit for the same sale.
• Ignoring returns, cancellations and leads that never convert.
• Comparing short periods that don't reflect normal trading.

A good check is to compare total marketing spend with total new revenue across the whole business, not just what each platform reports. If the platforms say you made far more than the business actually did, trust the business figures.

The weekly view

You don't need a complicated dashboard. A short weekly report with spend, revenue or leads, ROAS or CPA, and a comparison with the target and with last year is enough to make good decisions. That is the format we use with our own clients.

If you'd like to know what your numbers really are, ask for a free account review. We'll check your tracking, work out your real cost per sale or lead, and tell you where the budget is best spent.

Frequently asked questions

What is a good ROAS?

It depends on your margins. Your break-even ROAS is 1 divided by your gross margin, so a business with a 40% margin breaks even at a ROAS of 2.5. A good target sits comfortably above that.

What is the difference between CPA and CAC?

CPA is the advertising cost of one conversion. CAC is the full cost of winning a customer, including ad spend, fees, staff time and software. CAC is usually higher and more honest.

How do I calculate customer lifetime value?

A simple version is average profit per order multiplied by the average number of orders per customer. Use real repeat purchase data rather than assumptions.