Maximizing Digital Marketing with Break-Even ROAS Analysis
Break-Even ROAS Calculator
Break-Even ROAS & CPA Calculator
Unveil the Potential of Your Ad Spend:
Use our calculator to discover the break-even Return on Ad Spend (ROAS) and Cost Per Acquisition (CPA), ensuring every dollar spent on digital advertising is an investment towards profitability.
What Is ROAS?
ROAS stands for Return on Advertising Spend. It is the metric used to measure the effectiveness of your ad campaigns. The break even point is where the revenue generated from the campaign is equal to the cost of running the campaign. You're not making money, but you're not losing money. Your return on investment is equal to the cost.
Here's what the values in the calculator mean:
Average Order Value ($): The average revenue per order in dollars.
Product Costs ($): The average cost of goods sold per order.
Other Variable Costs ($): Include additional expenses like shipping, handling, packaging, and fulfillment fees.
Break-Even ROAS: Your basement ROAS performance within paid advertising.
Break-Even CPA: Your basement CPA for each purchase.
Understanding ROAS in Digital Marketing
ROAS (Return on Ad Spend) embodies the essence of digital marketing success, showing the revenue generated from every advertising dollar spent. Achieving a break-even ROAS is an important balance where your investment in ad campaigns neither gains nor loses money, marking an important threshold for campaign evaluation and adjustment.
Calculating Break-Even ROAS: A Closer Look
Break-even ROAS is calculated from the average order value compared with the sum of product costs and all variable expenses involved in order fulfillment. This metric tells advertisers the minimum performance threshold their campaigns must achieve to simply break even. Your target performance should always be better than this number.
Example Breakdown:
Average Order Value: $100
Product Costs: $40
Other Variable Costs: $5
Result:
Based on the inputs, our Break-Even ROAS is 1.82. This means that for every dollar spent on ads we need $1.82 in revenue in order to cover costs. In addition, we can afford to pay up to $55 to acquire a customer at that break-even point.
How is it Calculated?
Breakeven ROAS is calculated by dividing the Average Order Value by the cost of goods + any other variable costs associated with fulfilling the order, subtracted from the Average Order Value. . Fulfillment costs might include transaction fees, shipping fees, packaging, and cost of a fulfillment center to fulfill your order.
Break Even ROAS = Average Order Value / Average Order Value - (Cost of Goods + Other Variable Costs)
Here's some example numbers:
Average Order Value: $100
Average Cost of Goods: 40% ($40)
Shipping Cost: $7
Processing Fees: 3% ($3)
Shipping Packaging: $3
Your calculation would look like this: 100 / 100 - (40+7+3+3) = 2.13
Your Break Even Return on Ad Spend = 2.13
Why is Break Even ROAS Important?
It is essential to understand this number for your business BEFORE running ad campaigns. In the example above we consider the factors that contribute to the success of a marketing campaign, which ultimately mean we made money. Not that we broke even, and not that we got more sales.
In the example above, if you make an assumption that your break even ROAS is 2.0, which is consistently met during your campaign, you will unknowingly lose money on every order placed.
On the other hand, if you make an assumption your break even ROAS is 2.5, but you only achieve a 2.3 during the early phases of your ad campaign, you will likely shut down your efforts in order to avoid losing money. In this case you would be making money, and lose out on the opportunity to scale your campaign and leave a significant amount of profit on the table.
Other Factors to Consider
CPA, or Cost per Acquisition, is also defined by the calculations above. This number tells us how much money we can afford to spend to acquire each customer through paid advertising. In the example above, our break even CPA is $47. This means we can pay $47 to acquire a customer and break even. Breaking even shouldn't be your goal, so your target should be below this number to drive gross profit.
Introduction of Customer Lifetime Value
The most overlooked metric in paid advertising is Customer Lifetime Value (CLV). This is the total amount of revenue, on average, that a single customer spends with your business.
You must understand CLV, and use it as a consideration for acquiring customers, when engaging with paid advertising.
Use the calculator below to calculate your Break Even ROAS when considering CLV.
Break Even ROAS Calculator with CLV
Outputs:
Inputs:
Average Order Value = The average amount spent per individual transaction with your business.
Customer Lifetime Value = Total Sales for your business divided by number of customers in that time. Try to use at least 12 months of data to calculate this value.
Average COGS per order ($) - the average cost of goods in an individual order, as a dollar amount.
Average COGS per order (% of AOV) - the average cost of goods in an individual order, as a %.
Average Other Variable Costs per Order ($) - the average cost of other costs associated with fulfilling an order, which may include merchant processing fees, packaging costs, fulfillment costs, etc...Enter as a total dollar amount.
NOTE: The calculator only needs Average COGS per Order as a dollar amount, or %. Not both. Enter whichever is it easier for you.
Outputs:
Average Orders per Customer = The average number of times a customer orders from your business. This is calculated by dividing CLV by AOV.
Total Costs = The total costs to fulfill all orders a customer places on your store, on average. This is calculated by adding all costs per order and multiplying by the average orders per customer.
Total Customer Lifetime Gross Margin = The total amount of money a customer contributes to your business after all fulfillment costs associated with all of their orders. This is also your Break Even Acquisition Cost for customers. It is calculated by subtracting total costs for all orders from the CLV.
First Order Break Even ROAS = The ROAS break even point for your advertising to break even on the total amount of money a customer contributes to your business. Your target should be above this number in order to grow profitably.
Here's an example:
Average Order Value: $100
Customer Lifetime Value: $275
Average Cost of Goods: 30%
Other Variable Costs per Order: $6
The output provides us with Break Even ROAS of 0.57.
This metric is overlooked by 99% of marketers, but is a very important factor in setting strategy for your business. You will limit the growth of your business, and the amount of money you make, if you only consider the first purchase from your customers in the calculation of how much money you are willing to spend to acquire a customer through paid advertising.
I get it, it takes guts to acquire customers with this logic. It feels like you're losing money on every purchase. Up front you might be. Over time your repeat customers will come back and buy again without spending a single dollar on paid advertising. You are competing against businesses that understand this equation, and are willing to invest in customer acquisition to build their business. If they are willing to spend more to acquire a customer than you are, they will win every time.
Make it a goal to increase your Customer Lifetime Value by using email marketing, organic social media, SMS, and increasing your Average Order Value for every purchase.
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