In short: ROI (Return On Investment) is the ratio between the net profit an activity produced and what it cost, expressed as a percentage: ROI = (profit minus cost) divided by cost, times 100. It is not the same as ROAS. ROAS divides revenue by ad spend and ignores the cost of goods, which is why a campaign can show a ROAS of 4 and still lose money. The bridge between them is ROI = ROAS times gross margin, minus 1. In Israel you also need to strip VAT (18%) out of reported revenue before you calculate, otherwise the ROI is inflated.
What is ROI (return on investment)?
ROI is a profitability metric that compares what you earned with what you spent to earn it. It does not measure how much money came in, it measures how much stayed. The metric is used in capital markets, real estate, provident funds and retail, and also in digital marketing, but in digital marketing it is the metric most people calculate incorrectly.
A positive ROI means the activity left a profit after all of its costs. A negative ROI means the costs exceeded the gross profit the activity generated, so it burned money even if the top line looked healthy.
Note the wording: ROI is expressed as a percentage ("a 60% return"), while ROAS is expressed as a multiple ("4x"). When someone says "we have a return on investment of 20x", they almost always mean ROAS, not ROI. That confusion is the number one reason businesses discover at year end that the "successful" campaign left no profit.
The ROI formula, step by step
The full formula is:
ROI = (gross profit from the activity minus the cost of the activity) divided by the cost of the activity, times 100
Gross profit, not revenue - that is the critical point. Anyone who puts turnover in the numerator instead of profit is calculating ROAS and calling it ROI. Here is a complete calculation on realistic ecommerce numbers:
| Step | What goes in | Amount |
|---|---|---|
| 1 | Campaign revenue, before VAT | ILS 40,000 |
| 2 | Cost of goods, shipping, packaging and payment processing (60%) | ILS 24,000 |
| 3 | Gross profit (step 1 minus step 2) | ILS 16,000 |
| 4 | Media budget | ILS 10,000 |
| 5 | Net profit from the activity (step 3 minus step 4) | ILS 6,000 |
| 6 | ROI (step 5 divided by step 4) | 60% |
That exact same campaign is reported in Google Ads as a ROAS of 4.0. Both numbers are correct, they simply answer two different questions.
ROI vs ROAS vs POAS: three different numbers for one campaign
All three metrics measure the same activity, but only one of them answers the question "did I make money".
| Metric | Formula | What it answers | Value in the example |
|---|---|---|---|
| ROAS | Revenue divided by ad spend | How much turnover each media shekel produced | 4.0 (400%) |
| POAS | Gross profit divided by ad spend | How much gross profit each media shekel produced | 1.6 |
| ROI | (Gross profit minus spend) divided by spend | How much is left relative to the investment | 60% |
Note the relationship: ROI = POAS minus 1. A POAS of 1.0 is exactly break-even, which is an ROI of zero. Any POAS below 1 is a loss, however impressive the ROAS looks.
Google's own definition of ROAS is "the average conversion value (for example, revenue) you'd like to get for each dollar you spend on ads", surfaced in the interface as the Conv. value/cost column and set as a percentage target (for example, USD 5 in sales per USD 1 of spend is a 500% target ROAS). In other words, Google itself does not call this metric ROI, and rightly so.
The bridge formula: ROI = ROAS times gross margin, minus 1
If you already know your ROAS from the platform and your product gross margin, you do not need to recalculate anything. Convert:
ROI = (ROAS times gross margin) minus 1
In the example: 4.0 times 0.40 equals 1.6, minus 1 equals 0.60, that is 60%. The table below solves the equation in advance for common combinations. A negative number means a loss.
| Gross margin | ROAS 2 | ROAS 3 | ROAS 4 | ROAS 5 | ROAS 8 |
|---|---|---|---|---|---|
| 20% | -60% | -40% | -20% | 0% | 60% |
| 30% | -40% | -10% | 20% | 50% | 140% |
| 40% | -20% | 20% | 60% | 100% | 220% |
| 50% | 0% | 50% | 100% | 150% | 300% |
| 60% | 20% | 80% | 140% | 200% | 380% |
Read the 20% row: even a ROAS of 4, a number most advertisers would celebrate, produces a negative ROI of minus 20% there. That is precisely why you cannot judge a campaign on ROAS without knowing the gross margin.
VAT at 18%: the mistake that inflates every ROI calculation in Israel
The Israeli VAT rate has been 18% since 1 January 2025 and remains 18% in 2026. This matters for ROI because some commerce platforms report order value to the ad platforms including VAT. Google's own documentation on conversion values does not state whether the value you send should include tax or not, so the behaviour varies between stores and between plugins. You have to check it in your own account rather than assume.
If reported revenue includes VAT, the ROAS you see is inflated by 18% relative to real profit, because the VAT was never yours. The fix is simple: divide reported revenue by 1.18 before feeding it into the formula. You can also do it with the reverse VAT calculator.
| ROAS the platform shows (VAT included) | Real ROAS (before VAT) | ROI at 40% margin, as it appears | Real ROI |
|---|---|---|---|
| 2.0 | 1.69 | -20% | -32% |
| 3.0 | 2.54 | 20% | 2% |
| 4.0 | 3.39 | 60% | 36% |
| 5.0 | 4.24 | 100% | 69% |
| 8.0 | 6.78 | 220% | 171% |
The ROAS 3.0 row is the dramatic one: a campaign that looks like a 20% return is actually 2%, barely covering itself. A business below the VAT registration threshold that does not charge VAT can skip this correction; everyone else cannot.
Break-even ROAS: how much you must return just to avoid a loss
Before setting a target, it helps to know where break-even sits. The formula follows directly from the previous one: ROI is zero when ROAS times gross margin equals 1, so break-even ROAS = 1 divided by gross margin. If the revenue reported to the platform includes VAT, multiply the result by 1.18.
| Gross margin | Break-even ROAS (revenue before VAT) | Break-even ROAS the platform will display (revenue including VAT) |
|---|---|---|
| 15% | 6.67 | 7.87 |
| 20% | 5.00 | 5.90 |
| 25% | 4.00 | 4.72 |
| 30% | 3.33 | 3.93 |
| 35% | 2.86 | 3.37 |
| 40% | 2.50 | 2.95 |
| 45% | 2.22 | 2.62 |
| 50% | 2.00 | 2.36 |
| 60% | 1.67 | 1.97 |
| 70% | 1.43 | 1.69 |
This is the number that belongs at the top of every store's dashboard. Once you know it, the tROAS target in Google or Meta stops being guesswork: you set it above the break-even line by the margin of profit you want, not by what sounds impressive. The unit economics behind it are covered in the complete ecommerce guide.
What must go on the cost side
A reliable ROI almost always breaks on the cost side rather than the revenue side, because revenue is easy to count and costs are easy to forget. These are the lines that must go in:
| Business type | Direct costs that must be included | Most commonly forgotten |
|---|---|---|
| Ecommerce store | Cost of manufacturing or buying the product, shipping and logistics, cardboard and packaging, payment processing | Returns and refunds, warehousing, store systems and software, customer service |
| Service business or lead generation | Hours actually worked on the client, materials, subcontractors | Sales time that did not close, admin hours, CRM and communication tools |
| Both types | Media budget, campaign management fees | Payroll cost of internal team members, commissions, discounts and coupons |
Two lines deserve emphasis. First, discounts and coupons reduce revenue without adding to cost, and they are easy to miss when you only look at the platform report. Second, if part of your spend is payroll, the number that belongs in the equation is the total employer cost, not the gross salary; the net salary calculator and the employer cost calculator give the right figure. Consolidating everything into one sheet or a management system such as Monday is what turns the calculation from an estimate into a measurement.
For the calculation to be real you also have to count every enquiry, including chat enquiries, so it is worth setting up WhatsApp click tracking before you compute a return.
ROI for lead generation: calculating when there is no revenue per conversion
In a business that generates enquiries rather than online sales, the platform does not know how much money came in, so ROAS simply does not exist. The formula that works is:
ROI = (number of leads times close rate times gross profit per deal, minus spend) divided by spend
| Input | Value |
|---|---|
| Monthly media budget plus management fee | ILS 12,000 |
| Leads received | 80 |
| Cost per lead | ILS 150 |
| Close rate | 12% |
| Deals closed | 9.6 |
| Average gross profit per deal | ILS 2,500 |
| Total gross profit | ILS 24,000 |
| ROI | 100% |
The critical number here is gross profit per deal, which is the absolute ceiling on acquisition cost. If a deal produces ILS 2,500 of gross profit and the close rate is 12%, every lead is worth ILS 300 in expectation, and that is the break-even CPL. A cost per lead above that is a guaranteed loss. Make sure the cost side includes the management fee and not only the media budget, otherwise the CPL you are comparing against is lower than the truth. The full logic of channel choice and enquiry pricing is set out in the online advertising for businesses guide, and the relationship to acquisition cost is covered on the CPA, cost per acquisition page.
Why Google and Meta together report more revenue than you actually made
If you add the revenue Google Ads reports to the revenue Meta Ads Manager reports, you will usually get more than what actually reached the bank. This is not a bug. Each platform attributes to itself any conversion that happened inside its own attribution window, so when a customer saw an ad on Facebook and then searched for the brand on Google, both platforms count the same sale. Attribution windows and attribution models differ between platforms, which makes this overlap structural.
The standard answer is to also measure MER (Marketing Efficiency Ratio), also known as blended ROAS:
MER = total business revenue divided by total marketing spend across all channels
MER is built on real revenue from the commerce platform or the books, so it is immune to attribution overlap. The practical rule: use platform-level ROAS to compare campaign against campaign and make optimisation decisions, and use MER and ROI to decide whether the activity as a whole is profitable. The two are not competing, they answer questions at two different levels.
Over what period should ROI be measured
ROI without a time frame is a meaningless number. Three different measurement points give three different answers for the same campaign:
| Measurement horizon | What goes into the calculation | When to use it |
|---|---|---|
| Single transaction | Profit from the first order only | One-off product, or an immediate cash-flow profitability check |
| Calendar month | All revenue against all marketing spend in the month | Day-to-day management, month-over-month comparison |
| Customer lifetime value (LTV) | Profit from all repeat purchases by the same customer | Subscription, consumable product, any business with repeat purchases |
A repeat-purchase business that measures ROI on the first order alone will conclude that marketing is losing money, and will cut a budget that actually generates profit over time. Conversely, a business that measures only on LTV can burn cash in the short term. The practical fix is to know your payback period, meaning how many months it takes for cumulative gross profit from a customer to cover the cost of acquiring them.
Five mistakes that turn a positive ROI into a real loss
- Calculating ROAS and calling it ROI. The most common mistake, and the one that leads to scaling budget on a losing campaign.
- Leaving VAT inside revenue. An 18% inflation that moves marginal campaigns from negative to positive on paper only.
- Counting only the media budget as cost. Management fees, internal payroll and tooling are all part of the investment.
- Adding up reported revenue from every platform. Attribution overlap creates revenue that does not exist. Measure MER against the books.
- Measuring over too short a window. In a repeat-purchase business or a long sales cycle, monthly measurement alone paints a falsely negative picture.
Tools for an accurate calculation
Rather than estimating from memory, these free tools build each component of the equation:
- Ecommerce profitability calculator - works out the gross margin, which is the multiplier in the bridge formula.
- Reverse VAT calculator - extracts the pre-VAT revenue from a reported amount.
- Gross to net salary calculator and employer cost calculator - put the real cost of people on the cost side.
Sources and calculation method
The definition of ROAS and the percentage phrasing of the target are taken from the official Google Ads Help documentation on Target ROAS and on conversion values; that same documentation does not state whether the conversion value you send should include tax, which is why this guide recommends checking it manually in each account rather than trusting a default. The 18% VAT rate is the rate that took effect on 1 January 2025 and applies in 2026. Every table in this guide is direct arithmetic from the formulas shown, not an estimate or a market benchmark, so any cell can be reproduced. The example figures are illustrative and do not represent a specific client.
Written by Shay Cohen, founder of SFB Digital Marketing and a Google and Meta campaign manager for over a decade, based on day-to-day work on Israeli ecommerce and lead generation accounts.
Frequently asked questions
What is ROI in simple terms?
ROI is how much money you are left with relative to how much you put in, as a percentage. If you invested ILS 10,000 and were left with ILS 6,000 of profit after all costs, the ROI is 60%.
How do you calculate ROI in digital marketing?
Subtract all the costs of the activity from the gross profit it generated, divide by the cost of the activity and multiply by 100. Put gross profit in the numerator rather than turnover, and put management fees as well as media budget in the denominator.
What is the difference between ROI and ROAS?
ROAS divides revenue by ad spend and ignores cost of goods, so it is a media efficiency metric. ROI accounts for cost of goods and every other cost, so it is a profitability metric. A ROAS of 4 in a business with a 20% gross margin is a negative ROI of minus 20%.
What counts as a good ROI in paid advertising?
There is no single number, because it derives from your gross margin. Any positive ROI beats zero, but the practical target is an ROI that also covers the fixed costs of the business and not only the direct costs of the sale. Calculate your break-even ROAS first, then set a target above it.
What is break-even ROAS and how do you calculate it?
Break-even ROAS is the ROAS at which gross profit exactly covers ad spend, meaning an ROI of zero. The formula is 1 divided by gross margin. At a 40% margin, break-even ROAS is 2.5. If the revenue reported to the platform includes VAT, multiply by 1.18 to get 2.95.
Should VAT be removed from revenue before calculating ROI?
Yes, if the revenue you are feeding into the calculation includes VAT. VAT is collected on behalf of the tax authority and is not business income, so leaving it in inflates the ROI. Divide by 1.18 for the Israeli VAT rate of 18%. A business that does not charge VAT does not need the correction.
What is POAS and when is it better than ROAS?
POAS is Profit On Ad Spend, gross profit divided by ad spend. It is better than ROAS in a store selling products with very different margins, because there an identical ROAS across two campaigns can hide opposite profitability. The relationship is simple: ROI equals POAS minus 1.
Why is combined Google Ads and Facebook revenue higher than actual revenue?
Because each platform attributes the same conversion to itself inside its own attribution window, so when a customer is exposed to both, both count it. That is why you should also measure MER, total business revenue divided by total marketing spend, against the books rather than against the platform.
How do you calculate ROI in a business that generates leads rather than online sales?
Multiply the number of leads by the close rate and by average gross profit per deal, subtract the spend including management fees, and divide by the spend. Gross profit per deal times close rate is also the ceiling on the cost per lead you can afford.
What is a negative ROI?
A negative ROI means the gross profit from the activity was lower than its cost, so the activity lost money. It can happen even while turnover grows, if margins are thin or if uncounted costs enter the equation.
Once you have a target cost per result, you can derive the required daily budget directly from it. That calculation is set out in the minimum budget for a Facebook campaign.
