How to Calculate Break-Even ROAS?

Want to know why your ad campaigns are failing even after rigorous optimizations? Check out how to calculate break-even ROAS and try again for better outcomes. 

How great would it be to run a shiny new ad campaign where the clicks are rolling in, sales are trickling through and ROAS (Return on Ad Spend) shows a promising 2.0? Sounds pretty amazing right? However, if this feels pretty good, and you are thinking “I am doubling my money,” you might be wrong. 

In fact, what if your campaign costs and product expenses are eating into that revenue, or what if instead of doubling money, you are actually losing it? 

Yes, this can happen for real, and no matter how nightmare-ish this sounds for you, it can happen if you don’t calculate ROAS for ads like you are supposed to. This is where the concept of Break-Even ROAS comes in the big picture. It’s the number you need to hit just to cover your costs, so you know when your ad spend is paying off, and when it’s draining your wallet. 

Want to know how to find a break-even point for ROAS? Stick around and by the end of this guide, you won’t just know how to calculate your break-even ROAS, but also how to use the number to run profitable campaigns. 

What is ROAS (Return on Ad Spend)?

Before we go any further, let’s quickly revisit what ROAS (Return on Ad Spend) actually means. Primarily, ROAS is an online advertising metric that tells you how much revenue you are generating for every dollar you spend on ads. Here’s the ROAS calculation formula: 

ROAS= Revenue ÷ Ad Spend

For instance, if you spent $500 on a Facebook ad campaign, and generated $2,000 in revenue from it, your ROAS would be:

$2,000 ÷ $500 = 4

You might think you are earning $4 for every $1 spent on ads, so you are on the right path. However, here’s the problem- ROAS on its own doesn’t tell the entire story. It’s just a revenue measure, and what it doesn’t consider are your actual costs, like the price of your product, shipping, transaction fees, and other associated expenses. So, while a high ROAS might look excellent on paper, you could still be losing money, if your costs are affecting your earnings too. 

This is where the break-even point in advertising or break-even ROAS comes into play. 

What is Break-Even ROAS?

If you are wondering when ROAS breaks even, when it reaches the value of 1, which means the revenue generated from ads is exactly equal to the cost of the ads, so there’s no profit or loss. 

Definition-wise, Break-even ROAS is the minimum ROAS a brand needs to cover all its costs- no profit, no loss. It’s primarily the line at which an ad campaign stops being a financial wreck on your business and starts breaking even. So, if your ROAS falls below this number, you are operating at a loss. But if it’s above it, congrats- you are profitable. 

Why is Break-Even ROAS So Important?

For understanding break-even ROAS, you need to understand why it’s crucial. So, without further ado, let’s take a deep plunge into the significance of this metric-

• Identifying Money Pits: You are running an ad campaign, and your ROAS is 2.0, so you might think it’s doing well. But, what if your break-even ROAS is 2.5? This means you are actually losing money. Break-even ROAS can help you spot these underperforming campaigns, and take action as soon as possible. 
• Setting Goals: Marketers fail to crack advertising because they set superficial or impossible goals without ad spend profitability analysis. You can dodge that mistake and make a smarter move. By knowing your break-even ROAS, you can set more accurate goals for your ad campaign. So instead of an arbitrary ROAS, you have a clear break-even point to optimize your ROAS for profitability. 
• More Profit: Once you have a clear idea of your break-even ROAS, you can focus on the key metrics to optimize ROAS, so you can give all your attention to campaigns that are generating a higher ROAS and pause those that are underperforming. 

Now that you know why it’s important, let’s talk about how to calculate break-even ROAS. 

The Formula for Break-Even ROAS

The break-even ROAS formula is surprisingly simple. It goes like this:

Break-Even ROAS = 1 ÷ Gross Margin

Where your gross margin is the percentage of revenue that you keep after covering your Cost of Goods Sold (COGS). 

In simpler terms, it’s the profit margin on the product or service you are selling, excluding your ad costs. 

To calculate the Gross Profit Margin, you can use the following updated formula:

Gross Profit Margin = {Revenue – (COGS + Fulfillment Fee + Transaction Fee)} ÷ Revenue

For example, if you sell a product for $100, the cost to produce or acquire the product (COGS) is $40, the fulfillment fee is $10, and the transaction fee is $5, the Gross Profit Margin would be:

Gross Profit Margin = ($100 – ($40 + $10 + $5)) ÷ $100 = $45 ÷ $100 = 0.45 or 45%

Once you have calculated your Gross Profit Margin, you can plug it into the Break-even ROAS formula:

Break-Even ROAS = 1 ÷ Gross Profit Margin

Using the example above, the break-even ROAS would become:

Break-Even ROAS = 1 ÷ 0.45 = 2.22

This means, your campaign needs to generate at least $1.67 in revenue for every $1 you spend on ads just to break even. 

Common Pitfalls to Avoid while Calculating Break Even ROAS

Now that you know how to calculate ROAS for profitability with break-even ROAS, let’s talk about some common pitfalls marketers make while working with this metric:

• Ignoring Other Costs: One of the most massive mistakes marketers make is focusing only on their product costs while calculating their break-even ROAS. When you are analyzing your advertising profitability metrics, don’t forget to factor in additional costs like shipping, transaction fees, or fulfillment costs because if you ignore these, you will underestimate your break-even ROAS, which can lead to unprofitable campaigns. 
• Not Adjusting for Product Price Changes: If your product price changes (either through discounts, promotions, or permanent adjustments, so do your ROAS metrics like break-even ROAS. Many marketers forget to update their marketing efficiency metrics or their calculations when running sales or offering discounts, which can skew their expectations, and lead to losses. 
• Overlooking Customer Lifetime Value (CLV): Break-even ROAS focuses on specific campaigns; it doesn’t account for the long-term value of customers acquired through those campaigns. Many marketers ignore the CLV, and this can lead to prematurely pausing campaigns that might have brought in high-value customers who generate profits over time.
• Using Average Metrics Instead of Granular Data: Finding average is easy, which is why some people rely on overall ROAS across all campaigns. This can hide underperforming ads and cause budget shakedowns. To prevent this, break down your ROAS by campaign, ad group, or even certain ads, so you have a clear picture throughout the ad cycle. 
• Failing to Adapt to Rising Ad Costs: Digital advertising platforms like Google Ads and Meta Ads are becoming quite competitive, and they drive up costs per click (CPC) or impression (CPM). If your ad costs rise but you don’t adjust your Break-Even ROAS, you could end up running unprofitable campaigns without realizing it.

Break-Even ROAS Optimization Tips

Let’s make sure you are not just breaking even but actually thriving. Here are some practical, easy-to-apply tips to optimize your Break-Even ROAS:

• Know Your Numbers Inside Out: Don’t just guess your costs, dig deep! Include everything: product costs, shipping, transaction fees, and even those sneaky overheads. The more accurate your data, the clearer your Break-Even ROAS will be.
• Keep an Eye on Pricing: Running a discount or promotion? Your Break-Even ROAS changes too! Adjust your calculations whenever your pricing shifts to avoid surprises.
• Focus on High-Converting Audiences: Target customers who are most likely to buy. Retargeting campaigns or lookalike audiences can often deliver better ROAS compared to cold traffic.
• Experiment with A/B Testing: Not all ads are created equal! Test different ad creatives, copy, and targeting to find the winning combination that boosts your ROAS.
• Increase Your Average Order Value (AOV): Upsell, cross-sell, or bundle products to encourage bigger purchases. A higher AOV means you can spend more on ads while staying profitable.
• Reduce Ad Costs: Optimize your bidding strategy or refine your targeting to lower costs per click (CPC) or impression (CPM). Every penny saved helps your ROAS.
• Revisit Your Strategy Regularly: Costs, competition, and customer behavior change. Keep recalculating and refining your approach to stay ahead.

Tools to Simplify Break-Even ROAS Calculation for Different Platforms

Believe us when we say this: calculating break-even ROAS manually can be time-consuming and quite prone to errors. However, fortunately, there are tools and apps designed to make this process a lot easier for different eCommerce platforms. 

If you are tired of spreadsheets and manual calculations, here’s a curated list of tools you can use to streamline your Break-Even ROAS strategy:

For Shopify: Magnify Profit

Magnify Profit is an app that’s created specifically for Shopify store owners. The professionals in the industry use this to save time, so brands can focus on scaling their store, while ensuring their campaigns are always profitable. 

Features:

• The tool automatically calculates Break-even ROAS based on the campaign cost and revenue data
• It can track your ad spend and campaign performance in real time. 
• In addition, Magnify Profit helps identify profitable campaigns and those that need optimization. 

For WordPress (WooCommerce): AdCostly

WordPress doesn’t have a native ROAS tools, but you can integrate plugins like AdCostly effortlessly with WooCommerce to optimize campaigns and keep the costs in check. 

Features:

• AdCostly can help you track ad spend and calculate break-even ROAS across multiple ad platforms. 
• It can offer detailed insights into customer acquisition costs and profit margins. 
• The tool can also support integration with Google Ads and Facebook Ads for real-time monitoring. 

For BigCommerce: ProfitCalc

If you are using BigCommerce, you can always benefit from apps like PofitCalc to manage ROAS. The platform enables sellers to ensure their campaigns remain profitable without guesswork. 

Features:

• ProfitCalc can help users break down all expenses, including transaction fees, shipping costs, and taxes. 
• The tool offers a clear picture of profitability across all campaigns. 
• It has a user-friendly dashboard with customizable reports. 

For Wix: Wix Analytics with ROI Pro

The best part about Wix is the platform has built-in tools like Wix Analytics combined with apps like ROI Pro. These tools are perfect for Wix-based stores that want an easy solution for monitoring ROAS and analyzing the overall profit. 

Features:

• Users can use these tools to track ad performance and calculate Break-Even ROAS based on their product costs. 
• They can benefit from the customizable reports for detailed profit and expense analysis. 
• Besides, setting up these tools with the Wix stores is also quite straightforward. 

Universal Tool: BeProfit

If you are managing multiple stores or want a tool that can work across all platforms, BeProfit is an excellent choice. 

Features:

• Compatible with Shopify, WooCommerce, Wix, and BigCommerce.
• Tracks ad spend product costs, and even subscription revenue.
• Provides detailed visualizations to simplify decision-making.

Conclusion about Break Even Roas

We will say your break-even ROAS is more like having a GPS for your ad campaigns. It can tell you exactly where you stand, and whether your ads are working for or against you. Don’t want to commit any mistakes that can impact your break-even advertising metrics negatively? Reach out to the professionals for a clear idea between break-even ROAS vs profit margins, or to determine how much ROAS is enough for your business.