What does it mean? ROAS stands for return on ad spend.
For example if you had a ROAS of 2, this means for every $1 you spend on paid ads you’ll generate $2 worth of revenue. But the question here still stands: will I be profitable?
Most ecommerce owners would think so, but this is where we need to do an equation to work out the break even ROAS. This will then give you a target figure you have to meet which will signify when the ad campaigns are profitable for you.
At which point you can think about scaling your ad campaigns to generate your store more revenue/profit each month.
Download our free break even ROAs template to help you work it out quicker
Here’s a quick snapshot of our downloadable spreadsheet.
We’re going to take you through step by step and show you how we worked it out, so not only will you have a better understanding of it, but you’ll also be able to calculate it for yourself.
How to work out ROAS
ROAS is quite simple to work out. All you have to do is divide the revenue generated by your paid ads campaign by the amount you spent on ads.
ROAS formula: Total Ad Campaign Revenue / Total Ad Campaign Spend = ROAS
For example: $10,000 (Total Ad Campaign Revenue) / $5,000 (Total Ad Campaign Spend) = $2 (or 2:1) (ROAS).
It’s also worth noting that ROAS can be expressed in several different ways, including a percentage, multiple, ratio, or currency amount. So with this example, you can either say that your ROAS is 200%, 2x, 2:1, or 2 – they all mean the same thing.
How to work out break even ROAS
Break even ROAS formula: 1 / Average net profit margin
However, to work out your average net profit margin takes a couple of steps:
- Step 1 – AOV (Average order value) / COGs (Cost of goods sold) = Net profit
- Step 2 – Net profit / AOV (Average order value) * 1 = Net profit margin
If you don’t fancy manually working this out, you can use our spreadsheet to help you with this calculation.
It’s also worth noting that you should take the time to work out these numbers correctly. If you just guess any of your input figures like COGs (cost of goods) for example, you could skew the data.
This could then have a knock-on effect and your break even ROAS works out to be less than it is, meaning your ROAS target is wrong which would end up costing you lots of money.
Getting a return on ad spend will be the difference between your ad campaign making a profit or losing money. Pairing this with your break even ROAS means you know at what point you can’t sustain selling without losing money.
I’d hazard a guess and say a ROAS of ~1-1.99 in general wouldn’t be profitable for ecommerce businesses due to cost of goods, fulfillment and operational costs.
So even though you might have a positive ROAS – for example 1.70, you spend $1 and get back $1.70 – this still isn’t profitable (in this case).
Why ROAS matters
To consider scaling an ecommerce business profitably using paid ads, you first need to hit the break even ROAS point in your ad campaigns. From this point forward you’re opening your business up to the possibility of a lot of new customers, which in turn means higher net profit each month.
Using paid ads as part of your overall growth strategy is a great plan, but you need to make sure you’re doing this profitably otherwise you could end up haemorrhaging money.
You’ll probably find that compared to marketplaces that take ~15% sales acquisition cut, you might end up paying sometimes over double this to generate paid ads sales. This is why it’s important to make sure you know all your numbers when setting up all of your ad campaigns, so you know what’s a successful campaign and what’s not.
The second tab of our spreadsheet below helps you forecast potential commercial metrics around different ROAS milestones. From this you can get an idea of the potential returns you can hope to expect, along with the target CPA (cost per acquisition) you want to achieve, and then your target ROAS.
What ROAS is considered good?
From having access to many ecommerce ad accounts, as a rule of thumb we’ve seen that:
- If your ROAS is below 3:1 and above your break even ROAS threshold, you need to analyse your account and look for further growth opportunities.
- If your ROAS is 4:1, it’d be safe to say you’ll now be making a profit.
- If your ROAS is 5:1 or higher, I’d be very happy with this and try to funnel as much money into these campaigns as possible, as you essentially have a money machine.
The only caveat is that this is generalised information and may differ for your business.