How to calculate Breakeven ROAS (Return On Advertising Spend)?

If you are advertising on Google Ads and you have an ecommerce store you have probably seen a recommendation to use a ROAS bidding strategy. I decided to write this article to explain to current and future clients what does ROAS mean, how to calculate the break-even ROAS for your business and to exercise my JavaScript skills by building a simple ROAS calculator.

What does ROAS mean?

ROAS is an abbreviation for Return On Advertising Spend. It is a ratio between the amount of money you spend on your ads and the revenue they bring you. With it you can measure how efficiently you are spending your budget.

For example – If you spend $1000 on Google Ads and you sell $4000 worth of products then your ROAS or Conversion Value/Cost is 4000/1000 = 4. In Google Ads/Facebook ROAS is shown in percent so multiply the 4 by 100 and you get 400% ROAS. A 400% ROAS means that the campaign is getting you $4 for each $1 you spend.

What is a good ROAS?

A good ROAS is different for each business because it is influenced by profit margins, operating expenses, competition and other factors. I often see a common benchmark of 4:1 ratio or 400% being cited on the internet but I would be wary on relying on benchmarks and would advise to calculate your ROAS requirements based on your unique business situation – I have clients which require a ROAS of 10 in order to be profitable and clients who are happy with ROAS at around 3.

Calculating Breakeven or Profitable ROAS

If your ROAS is below 100%, then you are loosing money (not considering repeat purchases). But at what ROAS you will be profitable? To understand that you will need to consider the costs associated with your orders.

Break even ROAS formula: 1 / Average net profit margin.

To find out your Average net profit margin you need to calculate:

Step 1 – AOV (Average order value) / COGs (Cost of goods sold) = Net profit
Step 2 – Net profit / AOV (Average order value) * 100 = Net profit margin

To help you calculate this I build this simple calculator:

Breakeven ROAS Calculator

OR