When we ask a store owner whether their ads make money, the answer is often a feeling. Sales are coming in, the bank account looks fine, the ads dashboard says ROAS 5. So it must be working.
Maybe it is. But without one number you can't know, and many store owners don't have it: their break-even ROAS.
What ROAS means
ROAS stands for Return on Ad Spend. It's how much you sell for every pound you put into ads.
Spend £1 on ads and sell £3 of products from them: that's ROAS 3. Spend £1,000 and sell £5,000: ROAS 5.
What break-even ROAS means
Your break-even ROAS is the ROAS where an order pays for everything it costs, the ad included, and leaves you nothing. You're not losing money, but you're not making any either.
Above it, you make money on each order. Below it, every sale costs you money, however busy the shop looks.
The formula is short:
Break-even ROAS = 1 ÷ your margin
Margin here means what's left from an order after every cost, before advertising. And every cost really means every cost:
- the product itself
- delivery
- packaging
- payment fees
- returns (averaged over all your orders)
- VAT
- your share of the monthly costs: wages, your shop platform, apps and subscriptions, your accountant, rent or storage
The monthly costs don't come with a single order, so split them across your orders. £3,000 a month in wages and subscriptions over 500 orders is £6 an order. The more orders you have, the smaller that share gets.
An example
Say you sell a product for £60.
- VAT is 20%, so £10 goes to HMRC. You keep £50.
- The product costs you £22.
- Delivery is £5, packaging £1.20, payment fees £1.50.
- Returns cost you £1.30 per order on average.
- Your share of monthly costs is £6.
That's £37 in costs, so each order leaves £13. That's 26% of the £50 you keep.
Break-even ROAS = 1 ÷ 0.26 = 3.85.
Now the part most people miss. Your ads dashboard may count the full £60 the customer paid, VAT included. If it does, your break-even in that dashboard is 4.62, not 3.85. A campaign showing ROAS 4.2 looks fine against 3.85 and is actually losing money.
So check one thing first: does the revenue your ads report include VAT and delivery? Whoever set up your tracking can tell you, or we can check it for you.
If you don't want to do the maths
Here's a question we use when someone doesn't have their costs to hand. Take last month.
You spent £2,000 on ads. If that had brought in £12,000, would you have been happy?
That's ROAS 6. Most people say yes.
And if it had brought in £8,000?
That's ROAS 4. This is often where people stop and say they'd be roughly at zero. So their break-even is somewhere around 4. It won't be exact. It's good enough to start with, and far better than no number at all.
Three different ROAS numbers
Once you know your break-even, you'll notice ROAS shows up in more than one place, and the numbers don't agree.
- Your break-even ROAS. The number from above. It only changes when your prices or costs change.
- Your store's real ROAS. Everything your store sold, from your own shop backend, divided by everything you spent on ads. It's also called MER (Marketing Efficiency Ratio). It's the number that pays your bills.
- What the platforms report. Meta says one thing, Google says another.
Each platform counts the sales it thinks it caused. A customer who saw your Instagram ad and later clicked a Google Shopping ad gets counted by both. Add up what every platform claims and it's often more than your store actually sold.
For example: last month you spent £2,000. Meta reports £9,000 in sales and Google £7,000, so £16,000 between them: ROAS 8. Your store sold £12,000 in total. Your real ROAS was 6, not 8.
One caution. Your store's total also includes sales that had nothing to do with ads: people who found you on Google for free, came back from an email, or typed your address in. A store with a lot of those will see a real ROAS that looks better than it is. So be careful before reading it as proof that the ads work.
What to do with the number
- Keep it where you'll see it. When you look at a campaign, the first question is simple: is its ROAS above your break-even?
- Judge campaigns on at least two weeks of results, and a month if you only get a few sales a week. Single days jump around, and some sales are reported days after the click, so the last few days always look worse than they are.
- Compare like with like. If your break-even leaves VAT out, compare it with ad revenue that leaves VAT out too.
- Once a week, put two numbers side by side: what your store actually sold, and what Meta and Google say they sold. If the platforms start claiming a lot more than your store took, your tracking may be counting some orders twice.
If you'd rather not work it out by hand, our break-even ROAS calculator does it in a minute. And if you want someone to check these numbers in your actual ad accounts, it's one of the first things we do in your 30 days free.