Why a high return on ad spend can still lose money
ROAS is revenue divided by ad spend. It says nothing about what the revenue cost you to earn. An ad can return three times its spend and still lose money.
The break-even ROAS
The ROAS at which an ad pays for itself is 1 divided by the contribution margin ratio, where the ratio is what an order leaves (after VAT, payment fee, shipping and product cost) divided by the order's revenue. Fixed costs are left out of this number. If an order leaves a third of its revenue, you can spend up to a third of it on ads, and the break-even ROAS is 3.
An example
This is an illustrative example, not a real customer's numbers. An order to Germany at EUR 100.00 including VAT, a payment fee of EUR 2.90, shipping of EUR 9.00 and a product cost of EUR 40.00.
| Step | Amount in EUR |
|---|---|
| Revenue (VAT included) | 100.00 |
| VAT | -15.97 |
| Payment fee | -2.90 |
| Shipping | -9.00 |
| Product cost | -40.00 |
| Contribution | 32.13 |
The contribution is 32.13% of the revenue, so the break-even ROAS is 3.11. The ad platform reports a ROAS of 3.00, which looks fine. At 3.00, EUR 100.00 of revenue cost EUR 33.33 in ads, and the order only left EUR 32.13. Every order loses EUR 1.20, before any fixed cost.
What to do
Compare an ad's ROAS with your own break-even, not with a round number. The break-even ROAS calculator uses the same formula as Klirry, so you can put in your own order and read the figure. The next question is how long to wait before you act: when to pause an ad. See the methodology page for the formula and pricing for what it costs to have it on every ad.