- Break-even ROAS is the ROAS at which the gross profit from ad-driven orders exactly covers the ad spend.
- The formula is 1 divided by your gross margin rate: at a 40% margin, break-even ROAS is 2.5.
- Use gross profit (revenue minus product, shipping, payment and handling costs), not the product markup.
- Products and campaigns with different margins need different break-even points, so one store-wide ROAS target hides losses.
- Your target ROAS is break-even plus the profit you want to keep, or lower on purpose when new customers order again.
Break-even ROAS is the return on ad spend at which your ads exactly pay for themselves. Below it, every order the ads bring in costs you more in ad spend than it earns in margin. Above it, the ads make money. It is the one number that turns a ROAS in Ads Manager into a yes or a no.
The idea is simple, but stores get it wrong in two ways: they use the wrong margin, and they use one break-even point for every product. This guide shows the formula, a worked example, how margins change the answer, and how to turn break-even into a target ROAS.
The break-even ROAS formula
ROAS is revenue divided by ad spend. Your ads break even when the gross profit on the orders they bring in equals what you spent on them. Put those two together and the formula is short:
- Gross margin rate
- Gross profit as a share of revenue, for example 40%.
- Gross profit
- Revenue minus the costs that come with each order: products (COGS), shipping you pay, payment fees and handling.
At a 40% gross margin rate: 1 ÷ 0.40 = 2.5. Every $1 of ad spend must bring in $2.50 of revenue before the ads pay for themselves.
Why does it work? If your gross margin rate is 40%, each $1 of revenue leaves 40 cents of gross profit. To earn back $1 of ad spend you need $1 ÷ 0.40 = $2.50 of revenue. That ratio, $2.50 of revenue per $1 of spend, is a ROAS of 2.5.
A worked example
A store sells a skincare set for $60. Here is what one order costs the store:
| Line | Per order | Share of revenue |
|---|---|---|
| Revenue (excluding VAT) | $60.00 | 100% |
| Product cost (COGS) | −$18.00 | 30% |
| Shipping paid to the carrier | −$5.40 | 9% |
| Payment fees | −$1.80 | 3% |
| Packing and handling | −$1.20 | 2% |
| Gross profit | $33.60 | 56% |
The gross margin rate is 56%, so the break-even ROAS is 1 ÷ 0.56 = 1.79. A campaign at a ROAS of 2.0 makes money on these orders. A campaign at 1.6 loses money on every sale, even though Ads Manager shows more revenue than spend.
Why the margin matters so much
Break-even ROAS rises steeply as margins get thinner. A store with a 60% margin breaks even at 1.67. A store with a 20% margin needs a ROAS of 5.0 just to get its ad spend back.
This is why a ROAS that looks healthy for one store is a loss for another. A ROAS of 3 is excellent for a brand with a 60% margin and a loss for a reseller with a 25% margin, whose break-even is 4.0.
Which costs to include
Use the costs that grow with each extra order. Leave out the costs that stay the same however many orders you get.
| Include in gross profit | Leave out |
|---|---|
| Product cost (COGS) of the items sold | Ad spend (it is the other side of the ratio) |
| Shipping you pay the carrier, including free-shipping orders | Salaries, rent and software subscriptions |
| Payment and transaction fees | One-off costs such as a website redesign |
| Packing, pick-and-pack and other per-order handling | VAT and sales tax: they are not your money |
| Refunds and returns, as a share of revenue |
Two details trip people up. First, calculate revenue without VAT or sales tax: ad platforms often report the order value including tax, which makes ROAS look better than it is. Second, include refunds. If 8% of revenue comes back as refunds, your real margin is lower than the margin on the orders that stay.
Ad spend, other marketing costs and fixed costs come off later, one layer at a time. Our guide to contribution margin in ecommerce shows each layer, from gross profit down to net profit.
One break-even per product, not per store
Most stores sell products with very different margins. A single store-wide break-even point hides the products that lose money behind the ones that make it.
| Product line | Gross margin | Break-even ROAS | Campaign ROAS | Result |
|---|---|---|---|---|
| Own-brand skincare | 62% | 1.61 | 2.4 | Profitable |
| Bundles | 48% | 2.08 | 2.4 | Profitable |
| Branded tools (resold) | 24% | 4.17 | 2.4 | Loses money |
If you run separate campaigns per product line, give each its own break-even. If one campaign sells everything, the break-even depends on the product mix, so check it per campaign with the gross profit of the orders it actually brought in. That is exactly what POAS (profit on ad spend) measures: POAS divides gross profit by ad spend, so its break-even is always 1.0, whatever the product mix.
The same formula also works for the store as a whole. Divide total revenue by total ad spend and compare it with 1 ÷ your gross margin rate. That ratio is called MER, and MER vs ROAS explains when to use it instead of channel ROAS.
From break-even to target ROAS
Break-even is the floor, not the goal. To set a target, decide how much profit you want to keep from each dollar of revenue the ads bring in:
With a 56% margin and a goal of keeping 16% of revenue as profit after ads: 1 ÷ (0.56 − 0.16) = 2.5.
- Calculate gross profit per product line
Revenue without VAT, minus COGS, shipping, payment fees, handling and expected refunds.
- Turn it into break-even ROAS
Divide 1 by the gross margin rate. Write it next to every campaign that sells that product line.
- Choose a profit goal
Decide how much of each dollar of revenue you want to keep after ads, and calculate the target ROAS from it.
- Compare campaigns against their own target
A campaign under break-even needs fixing or pausing. One between break-even and target makes money, just less than you want.
- Recheck when costs change
New supplier prices, shipping rates or a discount campaign all move the break-even point.
When it makes sense to stay under break-even
A campaign that loses money on the first order can still be worth running when the customers it brings in order again. If a new customer is worth $150 in gross profit over a year and the first order earns $33.60, you can afford to spend more than $33.60 to win them, as long as enough of them come back.
Do this on purpose and with numbers, not as an excuse for a weak campaign. Look at how much the customers from that campaign actually spend over the following months, which is what customer lifetime value tracks. Split your reporting into new and returning customers, so a campaign that only re-sells to existing customers does not look like it wins new ones.
How ROASaurus helps
ROASaurus calculates gross profit for every order from your product costs, shipping, payment fees and handling. The profit dashboard shows Break-even ROAS under Blended ROAS. The Marketing page shows ROAS and POAS per channel and campaign, from the orders your store tracked. By default, revenue in profit analytics includes the taxes you collect. To match the formula in this guide, set Taxes collected to Left out of revenue under Profit › Cost settings.
You can try the formula on your own numbers with the free ROAS and break-even ROAS calculator, no sign-up needed.