What Is Break-Even ROAS? Formula, Examples and How to Use It

What ROAS actually measures

ROAS stands for return on ad spend. You work it out by dividing the revenue from an ad by what you spent on it. If you spend 10 on ads and the ads bring in 25 of sales, your ROAS is 2.5.

The number tells you how much revenue each unit of advertising produced. What it does not tell you is whether you made money. Revenue is not profit, and the costs of the product, shipping and fees come out of it. Break-even ROAS adds that missing piece.

The building block: contribution per order

Before you can find the break-even point, you need to know what one order leaves behind before advertising. We call that the contribution.

Contribution per order = price – product cost – shipping – payment fees – other costs

Payment fees are usually a percentage of the price plus a fixed amount. Our example uses 2.9% plus 0.30. That is only an example rate, so check your own payment processor for the figures that apply to you.

Contribution is what you have available to pay for advertising. Anything you spend on ads beyond it turns the order into a loss.

The break-even formulas

Once you know the contribution, the rest follows in a few lines.

• Margin % = contribution / price x 100
• Break-even ROAS = price / contribution
• Break-even CPA = contribution
• Target ROAS = price / (contribution – target profit per order)

CPA means cost per acquisition, here the cost of winning one order. Break-even CPA and break-even ROAS are two views of the same limit. One is a spend per order, the other a ratio of revenue to spend.

There is also a neat link between them. Break-even ROAS is the price divided by the contribution, so it is simply 1 divided by the contribution margin as a fraction. A margin of 0.565 gives 1 / 0.565, which is 1.77.

Three worked examples

An order with room to spare

A product sells for 50. It costs 15 to buy and 5 to ship. The payment fee at 2.9% plus 0.30 is 1.75. Contribution = 50 – 15 – 5 – 1.75 = 28.25. Margin = 28.25 / 50 = 56.50%. Break-even ROAS = 50 / 28.25 = 1.77, and break-even CPA is 28.25.

In words: you can spend up to 28.25 on advertising to win this order and still break even. Or, put the other way, every unit you spend on ads needs to bring back 1.77 units of revenue.

A simple case with no extras

A product sells for 100 and costs 60, with no other costs. Contribution = 100 – 60 = 40.00. Margin = 40.00%. Break-even ROAS = 100 / 40 = 2.50, and break-even CPA = 40.00.

An order that can never break even

A product sells for 20 but costs 30 to buy. The contribution is 20 – 30 = -10.00, which is negative. No ROAS, however high, can fix that, because every order loses money before a single ad is bought. The calculator shows “No break-even: costs exceed the price”.

Setting a target above break-even

Breaking even is a floor, not a goal. Most people want some profit left after the ads. Target ROAS includes the profit per order you want to keep.

Take the first example again, and say you want 10.00 of profit on each order. Target ROAS = 50 / (28.25 – 10) = 50 / 18.25 = 2.74. You now need 2.74 of revenue for each unit of ad spend, instead of 1.77.

If your target profit is as large as the contribution or larger, the formula divides by zero or a negative number. That means the target cannot be reached at this price. The calculator says so with “Target not reachable at this price”. The fix is a higher price, lower costs or a smaller target.

We make no claim about what ROAS is “good”. It depends entirely on your own costs, which is exactly why the break-even figure is worth calculating first.

When the calculation misleads you

The formulas are exact, but they only work with the numbers you give them. Here are the situations where the result can look better than reality.

• Missing costs. Packaging, returns handling or a marketplace fee that you left out raises the true cost and lowers the true contribution.
• Refunds and returns. The calculator does not remove them. If a share of orders come back, your real revenue per order is lower.
• Average prices. If you sell several products at different prices, one break-even figure can hide that some of them lose money.
• Fees that change. The payment rate in our example is a sample. A different rate changes the contribution and therefore the break-even.
• Revenue that includes tax. If the price you enter includes sales tax that you pass on, the contribution is overstated.

None of this makes the number useless. It just means you should check the inputs and treat the output as an estimate.

Before you rely on the number: a checklist

1. Enter the selling price per order, excluding any sales tax you pass on.
2. Add the full product cost, including anything you pay per unit.
3. Add the shipping or fulfilment cost per order.
4. Enter your real payment fee percentage and fixed fee.
5. Include any other per-order cost, such as packaging.
6. Decide on a target profit per order, or leave it blank for break-even only.
7. Compare your actual ad results with the break-even and target figures.

If your costs involve a marketplace, our guides on eBay fees and Etsy fees show how those fees are worked out. And if you are not sure whether your price leaves enough margin, markup vs margin explains the difference between the two measures.

Frequently asked questions

Tools used in this guide

• Break-Even ROAS Calculator
• Markup vs Margin Calculator

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Photo: Luke Chesser on Unsplash