How Do You Calculate Break-Even ROAS?

How Do You Calculate Your Break-Even ROAS, Step by Step?

ROAS (return on ad spend) is the revenue from your ads divided by what you spent on them, and break-even ROAS is the point where the margin on that revenue exactly covers the ad spend. Work it out from finance's margin figure, then compare it with the ROAS your ads produce.

1. Get your gross margin from finance, for the products or services you're advertising rather than the company average, since margins often differ a lot between lines.
2. Subtract the other costs that come with each sale, such as payment processing, shipping, packaging, sales commissions and returns, each as a share of revenue, to get your contribution margin.
3. Write that margin as a decimal, so thirty percent becomes 0.3.
4. Divide 1 by that decimal, and the result is your break-even ROAS.
5. Convert it to a percentage if your ad platform asks for one, as Google Ads does for its Target ROAS bidding, by multiplying by a hundred.

The lower your margin, the more revenue each ad dollar has to bring back before it pays for itself:

A ROAS above your break-even number means each sale's margin covered the ads that won it, though not yet your rent, salaries or profit, which is why break-even is a floor and never a goal. The Channel Selection step covers how to get revenue figures you can trust for the other side of the comparison.

Should Break-Even ROAS Use Gross Margin or Contribution Margin?

Use contribution margin, which is revenue minus every cost that rises with each sale, because gross margin alone usually leaves out payment fees, shipping and commissions, and a break-even ROAS built on it is lower than the real one.

Leave fixed costs such as rent and salaries out of the margin, since they don't change with one more sale. Agency fees and creative made only for the ads belong on the spend side instead, so add them to ad spend before you calculate your actual ROAS, or the campaigns will look closer to profitable than they are.

How Do You Calculate Break-Even ROAS Given Lifetime Value?

If customers come back and buy again, the first sale doesn't have to cover the whole cost of the ads, so divide your first-sale break-even ROAS by how many times larger a customer's lifetime revenue is than their first purchase. A customer who spends three times their first order over the relationship lowers the first-sale break-even ROAS to a third of the single-sale number.

How far to rely on that is a business decision, and we don't think one rule fits every company, because it depends on how sure you are that customers return, how soon the repeat profit arrives and whether your cash flow can wait for it. A business whose customers spend most of their money in the first few months gains little from counting lifetime value, while one with long contracts can gain a lot.

We'll use one running example from the rest of this site: a commercial HVAC contractor with annual revenue of about forty million dollars, which sells maintenance agreements to property management firms and wins them through Google search, LinkedIn ads and a local building owners' association.

Even so, the long agreements are why the contractor can afford LinkedIn, its most expensive channel per agreement, since each added agreement there still earns its cost back within the first year and has six more years of profit to follow.

How Do You Calculate Break-Even ROAS for Facebook Ads?

The calculation is the same on Facebook, Instagram, Google or any other platform, because break-even ROAS comes from your margin, and what changes is how far you can trust the ROAS the platform reports.

Meta calculates purchase ROAS as purchase conversion value divided by amount spent, counting sales attributed to your ads, and it says statistical modeling may fill in some events and their values when data is partial or missing.¹ Google Ads takes a Target ROAS as a percentage, so $5 of conversion value for every $1 of spend is entered as 500%.² Before you compare either one with your break-even number, check three things:

• Which revenue the platform is counting, since a conversion value that includes sales tax or shipping charges overstates the revenue your margin applies to.
• Whether the platform is crediting itself generously, because each platform counts sales it touched, including people who would have bought anyway, so two platforms can claim the same order, as the account in how to measure digital marketing ROI shows.
• Whether the sale happens where the platform can see it, because for businesses that close on calls or signed contracts, as the contractor does, the platform's ROAS is only as good as the results your CRM sends back to it.

So treat the platform's ROAS as a second opinion and calculate your own from revenue you can trace in your CRM or store. A campaign that sits narrowly above break-even on the platform's own numbers can easily be below it in reality.

How Is Break-Even ROAS Different From a Target ROAS?

Break-even ROAS is the floor where the ads pay for themselves and nothing more, while a target ROAS sits above it to leave room for the fixed costs and the profit the business needs. How far above depends on your margin, your growth goals and how much volume you give up as the target rises, which is the subject of what is a good ROAS.

With the floor worked out, do four things:

1. Write your break-even ROAS beside the ROAS in your ad reports, per product line if margins differ, so every review starts from the same line.
2. Pause or fix campaigns that sit below the floor you chose, first-sale or lifetime, on your own revenue figures for a full sales cycle, starting with what happens after the click.
3. Set any bid target in the platform above your break-even number, never at it, since a target at break-even asks the platform to spend all of your margin.
4. Revisit the number when margins move, after a price change, a supplier increase or new shipping rates, because the floor moves with them.