A good ROAS isn't a good business model

One of the topics we discussed at our recent Boardroom session was unit economics.

More specifically, the difference between ROAS and CAC.

One founder mentioned they were not tracking CAC because they already tracked ROAS. That is understandable because ROAS absolutely has a place.

But there is a very important difference between the two. And if you are a founder scaling a business, understanding that difference matters.

ROAS stands for Return On Advertising Spend.

At its simplest level, it measures how much revenue you generated compared to what you spent on ads.

Spend £1,000 on ads and generate £5,000 in revenue and you have a 5x ROAS.

That is useful. It helps marketing teams understand:

ROAS is a very good operational marketing metric.

The problem is that it can also be very misleading when viewed in isolation. Because ROAS only looks at ad spend versus revenue generated from that channel.

It does not look at the wider cost of acquiring a customer. It ignores:

Those costs can be substantial.

This is where CAC becomes far more useful from a founder perspective.

CAC stands for Client Acquisition Cost.

In simple terms, you take your total marketing and sales spend and divide it by the number of new clients acquired.

Importantly, I am talking here about blended CAC across the whole business, not channel-specific CAC, which is a much deeper topic.

Blended CAC gives founders a much clearer view of what it actually costs the business to acquire a customer.

CAC on its own is still only half the story.

The real insight comes when you compare CAC to Lifetime Value.

How much revenue will that customer generate over their lifetime?
What is the gross profit margin on that revenue?
How long do they stay?

Once you understand those numbers properly, you can start answering much bigger questions.

Can we scale profitably?
How aggressively can we grow?
How much can we afford to spend acquiring a customer?
What will this do to cash flow?

That last point is massively overlooked.

You might have excellent ROAS and still create huge cash flow pressure.

Why?

Because you pay the marketing cost upfront, but recover the profit slowly over time.

If it takes you ten months to recover your acquisition cost, growth itself can become the thing that creates cash flow problems.

ROAS does not tell you that. It also does not properly account for:

This is why founders and marketing teams should often focus on different metrics.

Your marketing team should absolutely track ROAS. They should care about:

But as a founder, your focus should be broader.

You should be looking at CAC, Lifetime Value, gross margin, and cash recovery periods. Because those are the numbers that determine whether growth actually creates value.

A good ROAS does not automatically mean you have a good business model.

That is the difference between marketing metrics and business economics.

More to come,
Luke

PS: I run The Boardroom every month. It's a free, small-group, in-person session for founders running £1m+ businesses, covering strategy, finance, growth, marketing efficiency and scaling challenges in a highly practical way. It's invite-only. If you'd like a seat, get in touch.