Break-even ROAS is the ROAS at which your ad spend equals the gross profit it brings in, so the ads pay for themselves and nothing more. The formula is 1 divided by your gross margin. A product with a 40% gross margin has a break-even ROAS of 2.5.
Above that number your ads make money. Below it, every sale they bring in loses some. The hard part is getting the margin right, because most people leave costs out of it.
What is the break-even ROAS formula?
The break-even ROAS formula is 1 divided by gross margin.
Break-even ROAS = 1 / gross margin
Gross margin is the share of each sale left after the costs that come with that sale. You can also write the formula with dollars instead of percentages:
Break-even ROAS = price per order / (price per order − variable cost per order)
Both give the same answer. A $50 order that costs you $30 has a gross margin of 40%, and $50 / $20 = 2.5. Written as a percentage, the same break-even point is 250%.
If you need the basics of ROAS itself first, what is ROAS covers the formula and how platforms credit sales.
How do you calculate break-even ROAS step by step?
To calculate break-even ROAS, find what an average order brings in, subtract every cost tied to that order, and divide the order value by what is left. You can do it on paper in five steps.
- Take your average order value after discounts.
- List every cost that comes with one order.
- Subtract those costs from the order value to get gross profit per order.
- Divide gross profit by order value to get gross margin.
- Divide 1 by the gross margin.
Say you sell a $60 skincare set. The products inside cost you $18. You pay $7 to ship it, $2 for the box and insert, and about $2 in payment fees. Returns cost you an average of $3 per order once you spread the refunds and the unsellable items across all orders.
Total cost per order is $32, so gross profit is $28 and gross margin is $28 / $60 = 46.7%. Break-even ROAS is 1 / 0.467 = 2.14.
Now say you had counted only the $18 of product. Your margin would look like 70% and your break-even ROAS like 1.43. At a ROAS of 1.8 you would think the ads were profitable. Check it: $1,000 of ads at a ROAS of 1.8 brings in $1,800, or 30 orders. Thirty orders at $28 of gross profit is $840, so you lose $160.
Which costs do people forget in break-even ROAS?
The costs people forget in break-even ROAS are the ones that come out of each order after the product itself. Each one raises the break-even point.
- Payment processing fees on every sale.
- Shipping you pay for, including orders that qualify for free shipping.
- Packaging, inserts and fulfillment charges.
- Returns and refunds, counted as the refunded revenue plus the cost of anything you cannot resell.
- Marketplace or app store fees, if the sale happens there.
- For software, the hosting and payment fees that come with each new customer.
Leave out fixed costs such as rent or the tools you pay for monthly. Those costs stay the same whether an ad sells one order or a hundred, so they belong in ROI. ROAS vs ROI shows how the two measures fit together.
Should the discount in my ad count toward break-even ROAS?
The discount in your ad should count toward break-even ROAS, because it lowers the price while the costs stay the same. Use the discounted price in the formula.
Take the $60 set at 20% off. The price drops to $48 and the costs stay around $32, so gross profit falls to $16. Gross margin is $16 / $48 = 33%, and break-even ROAS rises from 2.14 to 3.0. A sale ad needs a much higher ROAS to pay for itself, which is worth knowing before you plan one. The guide on when to run a sale covers the timing side.
How do you work out break-even ROAS for products with different margins?
To work out break-even ROAS for products with different margins, calculate it for each product using that product's margin. Then judge each campaign against the break-even of what it sells.
| Product | Price | Cost per order | Gross margin | Break-even ROAS |
|---|---|---|---|---|
| Candle | $30 | $21 | 30% | 3.33 |
| Diffuser | $80 | $40 | 50% | 2.00 |
| Refill pack | $20 | $8 | 60% | 1.67 |
| Gift set | $120 | $78 | 35% | 2.86 |
For a campaign that sells a mix, use a blended margin: total gross profit divided by total revenue. Say a campaign brings in $2,000 of candles and $1,000 of diffusers. Gross profit is $600 plus $500, or $1,100, on $3,000 of revenue. The blended margin is 36.7% and break-even ROAS is 2.73.
A campaign that mostly sells candles needs a ROAS above 3.33, even if the account as a whole looks fine at 2.5.
What is break-even ROAS for a subscription or software product?
Break-even ROAS for a subscription or software product depends on how many months of revenue you choose to count. Gross margins on software tend to be high, so break-even on the first payment is often low.
Say a plan costs $50 a month and each customer costs you $5 a month in hosting and payment fees. Gross margin is 90% and break-even ROAS on the first month is 1.11. If you are willing to wait for payback, count the revenue from the months a typical customer of yours stays. Pick a payback period you can afford to wait for, and judge the ads against that.
How is break-even ROAS related to break-even CPA?
Break-even CPA is the most you can pay in ad spend for one order without losing money, and it equals the gross profit on that order. It marks the same line as break-even ROAS, written as a cost per purchase instead of a ratio.
For the $60 skincare set, break-even CPA is $28. An ad that costs $25 per purchase makes $3 on each one. An ad that costs $35 per purchase loses $7. Use whichever form matches the number your ad platform puts in front of you.
How do the ways of setting a ROAS floor compare?
The common ways of setting a ROAS floor differ in how many of your costs they include. Only the full break-even calculation tells you where ads stop losing money.
| Approach | What it answers | What it misses |
|---|---|---|
| A rule of thumb such as 4:1 | A quick number to aim for | Your margin, so it can be far too high or too low |
| Break-even from product cost alone | A floor based on what the item costs | Shipping, fees, returns and discounts, so the floor sits too low |
| Break-even from every variable cost | The ROAS where ads stop losing money | The profit you want to keep, and fixed costs |
| A target ROAS with a profit goal built in | The ROAS that leaves the profit you want | Whether demand is there to reach it |
Verdius answers that last question for each product: when demand for it is rising.
Break-even is the floor. A target ROAS sits above it by the profit you want to keep, and what is ROAS gives the formula for that target.
How do you use break-even ROAS to decide when to spend?
You use break-even ROAS to decide when to spend by treating it as the line your ads must stay above, then watching how far above it they run at different times. The same ad at the same bid can clear the floor easily in some weeks and sink below it in others.
The difference is usually demand for the product. When electric car registrations climb for several months, more new owners shop for home chargers. When new business filings rise month after month, more founders look for accounting software before their first invoice. While a build-up like that is under way, more of the people who see your ad are ready to buy. Verdius spots build-ups like these for you and lists the events behind each window.
A simple rule follows from that:
- Keep a base level of spend that stays above break-even.
- Add spend while demand for the product is rising.
- Step back to the base when ROAS drifts toward the floor and demand has gone flat.
Pushing more money in while ROAS sits near break-even rarely helps, because extra spend reaches people who were less likely to buy. Verdius gives each window a start and a stop, so you know when to add spend above your base and when to pull it back.
Should I stop ads the moment ROAS dips below break-even?
You should not stop ads the moment ROAS dips below break-even, because a few days of data can mislead. Sales often get credited days after the click, and a slow week can recover on its own.
Look at a stretch of at least a week or two. Compare the ad platform's numbers with your own orders. If the customers these ads bring in tend to buy again, weigh that too. If ROAS stays below break-even for weeks while demand is flat, step spend down to your base level instead of switching everything off.
How does Verdius help you stay above break-even ROAS?
Verdius is software that predicts when demand for a product will rise and who to target then. Break-even ROAS gives you the floor, and the windows tell you when to add spend above it.
For each product you get:
- Optimal windows to run ads, each with a start and a stop, ranked against each other.
- The events behind each window, such as electric car registrations climbing for several months for home chargers.
- The audience to reach, in the terms ad platforms already use.
- Alerts when a window opens and when it closes.
Pair those windows with the break-even of each product. When two windows open at once, fund the one whose product has the lower floor first. It only reads your ad accounts and never launches, edits or pauses ads. See how Verdius finds windows.