Break-even ROAS is 1 divided by your contribution margin. Contribution margin is the share of each sale left after product cost, shipping, payment fees and returns, before ad spend. With a 40% margin, break-even ROAS is 2.5. Above that number, the first order makes money. Below it, you lose money on every sale.
The formula
At break-even, ad spend equals the profit left after variable costs. With a 40% margin you can spend at most 40 cents to earn each dollar of revenue, so ROAS = 1 ÷ 0.40 = 2.5.
What counts as contribution margin
Revenue minus every cost that rises with each order: product, shipping and fulfilment, payment fees, returns, discounts and marketplace fees. Ad spend and fixed costs are left out, and revenue should be net of tax. Gross margin from a profit and loss statement usually misses shipping, fees and returns, which flatters the result.
A worked example
The numbers are illustrative. An $80 order, after $24 product cost, $9 shipping and fulfilment, $2.60 payment fees and a $3.40 returns allowance, leaves $41.00 of contribution, a 51.25% margin. Break-even ROAS = $80 ÷ $41 = 1.95.
If you also want to keep 15% of revenue as profit, target ROAS = 1 ÷ (51.25% − 15%) = 2.76.
Break-even ROAS at common margins
| Contribution margin | Break-even ROAS |
|---|---|
| 20% | 5.00 |
| 25% | 4.00 |
| 30% | 3.33 |
| 40% | 2.50 |
| 50% | 2.00 |
| 60% | 1.67 |
You can try your own numbers in the profit calculator on our homepage. Once you know your break-even, compare it with your MER.
Frequently asked questions
What is a good ROAS?
One above your break-even ROAS with room for the profit you want. At a 40% margin, break-even is 2.5, so a ROAS of 4 is strong. At a 20% margin, break-even is 5.0, so a ROAS of 4 loses money.
What is the difference between break-even and target ROAS?
Break-even ROAS means you make nothing on the sale. Target ROAS is the higher figure you need once you decide how much profit to keep.