What is Break-Even ROAS?
Break-even ROAS is the minimum return on ad spend you need to achieve to cover your costs and not lose money on advertising. It's your floor, the point where you're neither making nor losing money on each ad-driven sale.
The formula is based on your profit margin:
For example, if your profit margin is 40%, your break-even ROAS is 1 / 0.40 = 2.5. This means you need to generate at least $2.50 in revenue for every $1 spent on ads just to cover costs.
Any ROAS above your break-even is profit. Any ROAS below means you're paying to lose money.
Why Break-Even ROAS is Critical
Many advertisers chase industry benchmark ROAS targets without understanding their own economics. A 3:1 ROAS might be excellent for one business but unprofitable for another, depending on margins.
Knowing your break-even ROAS helps you:
- Set realistic targets: Understand the minimum performance needed for profitability
- Make scaling decisions: Know when you can afford to spend more aggressively
- Evaluate campaigns: Quickly identify which campaigns are actually profitable
- Negotiate margins: Understand how supplier costs affect ad viability
Without this number, you're guessing at whether your advertising is actually making money.
How to Calculate Break-Even ROAS
Calculating break-even ROAS requires understanding all costs associated with each sale. Many businesses underestimate costs, leading to ROAS targets that are actually unprofitable.
Step 1: Calculate Total Variable Costs
Add up all costs that vary with each sale:
- Product cost (COGS): What you pay for the product
- Shipping: If you offer free shipping, this is your cost
- Transaction fees: Payment processor fees (typically 2.4-2.9%)
- Packaging: Boxes, inserts, tape
- Returns: Average cost of returns per order
Step 2: Calculate Profit Margin
Profit Margin = (Selling Price - Total Variable Costs) / Selling Price
If you sell for $100 and total costs are $60, your margin is 40%.
Step 3: Calculate Break-Even ROAS
Break-Even ROAS = 1 / Profit Margin = 1 / 0.40 = 2.5
Setting ROAS Targets Above Break-Even
Break-even is your floor, not your target. You need ROAS above break-even to cover fixed costs and generate actual profit.
How Much Above Break-Even?
A common rule of thumb is to target 20-50% above your break-even ROAS to ensure comfortable profitability after accounting for tracking inaccuracies and fixed costs.
For example, if your break-even ROAS is 2.5:
- Minimum target: 3.0 (20% above break-even)
- Healthy target: 3.75 (50% above break-even)
- Aggressive target: 5.0+ (for maximum profitability)
Account for Attribution Gaps
Reported ROAS often undercounts actual performance due to attribution issues. iOS tracking limitations mean platforms may only report 60-70% of actual conversions. Factor this into your target setting.
How to Improve Your Break-Even ROAS
A lower break-even ROAS gives you more room to acquire customers profitably. Here's how to improve it:
Improve Profit Margins
- Negotiate better supplier pricing at volume
- Reduce shipping costs through better carrier rates
- Minimize returns through better product descriptions
- Optimize packaging to reduce material costs
Increase Average Order Value
Higher AOV improves effective margin because some costs (shipping, packaging) don't scale linearly with order value. Use upsells, bundles, and free shipping thresholds.
Consider Customer Lifetime Value
If customers return for repeat purchases, you can accept lower first-purchase ROAS. Factor in LTV to set more aggressive acquisition targets knowing customers will become profitable over time.
Frequently Asked Questions
If your break-even ROAS is higher than typical benchmarks (e.g., 4:1 when benchmarks are 3:1), your margins are likely too thin for aggressive paid advertising. Consider improving margins through better supplier pricing, higher selling prices, or reduced fulfillment costs. Alternatively, factor in customer lifetime value if you have strong repeat purchase rates.
Break-even ROAS typically only considers variable costs (COGS, shipping, transaction fees). Fixed costs like rent and salaries are covered by profit above break-even. However, for a truly complete picture, ensure your ROAS targets are high enough above break-even to contribute to fixed cost coverage.
If customers make repeat purchases, you can accept lower ROAS on the first sale knowing you'll profit over time. Some brands calculate 'allowable CAC' based on LTV and work backwards to find their effective break-even. This allows more aggressive acquisition spending.
A high break-even ROAS indicates low profit margins. Common causes include high product costs, expensive shipping, significant transaction fees, or selling at prices too low for your cost structure. Audit each cost component to identify improvement opportunities.
Absolutely. Products with different margins have different break-even points. Calculate break-even ROAS for each product category or SKU. This helps you allocate ad spend to products that can profitably absorb advertising costs and avoid spending on low-margin items.
References
- Shopify - Understanding ROAS and calculating break-even for eCommerce advertising.
- Meta Business Help - ROAS optimization and target setting for Facebook Ads.
- Google Ads Help - Target ROAS bidding and profitability calculations.
