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If you're a business owner, marketer or advertiser, you've likely heard the term ROAS or break even ROAS. Or maybe you've seen the ROAS metric in your Facebook, TikTok or Google advertising account but wasn't sure what it means.
While ROAS is relatively easy to calculate, it's also one of the most important metrics for advertisers looking to avoid wasting money on unprofitable ads.
So what is break even ROAS exactly?
ROAS stands for Return On Ad Spend.
As you may guess, the name 10X ROAS means our full-service creative production will help you achieve a 10X return on your marketing and advertising investment.
ROAS, or Return on Ad Spend, as you've learned, is a crucial metric for measuring the performance of your advertising. It shows you how well your ads are performing and can help you determine whether or not they're worth the cost that went into them. ROAS tells you if your ads are profitable or not.
ROAS is a perfect benchmark for keeping track of how your marketing and advertising campaigns are performing over time.
If you see that your ROAS is going down, people aren't clicking on your ads and buying your products or services as they used to.
If you see that your ROAS is going up, then maybe it's time to start spending more money. If people respond well to your ads (like they've never done before), there's massive profit potential.
Here's how ROAS works. ROAS is calculated by dividing revenue generated from a campaign by ad spend.
ROAS = Total Revenue / Total Ad Spend
For example, if your Facebook campaign spent $1,000 and made $10,000 in revenue during that period, your ROAS would be 10. You can use the same formula to calculate the ROAS of your campaigns, ad sets and ads.
$10,000 / $1,000 = 10 ROAS
Sometimes, people will refer to ROAS in percent. In that case, 10 ROAS and 1,000% ROAS is the same thing written differently.
10 ROAS = 1,000% ROAS
Now that we know what ROAS stands for, what it means for our advertising campaigns and how to calculate it, let’s take a look at break even ROAS.
Break even ROAS is a simple concept built around an essential business principle: in order for your business to be profitable, your revenue from advertising needs to exceed the costs of the product or service you are promoting and what you paid for the same advertising.
This means that if the ROAS of your advertising campaign is higher than your break even ROAS, congratulations, your advertising campaign is profitable!
Break even ROAS formula is a bit more complicated than the ROAS formula we learned. To calculate your break even ROAS, you need to divide the number 1 by your average profit margin in percentage.
Break Even ROAS = 1 / Average Profit Margin (%)
What if you don't know your average profit margin? Don't worry; it only takes couple more steps to work out your average profit margin.
Step 1: Subtract your COGS (Cost of Goods Sold) from your Average Order Value (AOV).
Net Profit = Average Order Value (AOV) - COGS (Cost of Goods Sold)
For example, the average value of your order (AOV) is $50 and it costs you $30 to create (purchase) and ship the product.
$50 - $30 = $20 Net Profit
Step 2: Divide your Net Profit from the previous step by your Average Order Value (AOV) and multiply it by 100 to get your Average Profit Margin.
Average Profit Margin = Net Profit / Average Order Value (AOV) * 100
Here's what it would look like with numbers from our previous example.
$20 / $50 * 100 = 40%
Going back to our break even ROAS formula, here’s what your break even ROAS would look like with the 40% Average Profit Margin we have just calculated.
1 / 40% = 2.5 Break Even ROAS
Our break even ROAS we must achieve not to lose money on advertising is 2.5 or 250%.
There’s no one-fits-all rule when it comes to determining a good ROAS. A good ROAS depends on several factors:
Advertising channels with high purchase intent like Google Search Ads usually have a higher ROAS than advertising to a cold audience on Facebook or TikTok.
There’s no easy hack to increase your ROAS. Why? To increase your Return on Ad Spend, you must improve your ads, which is not easy but definitely possible. We have successfully increased ROAS and improved profitability for dozens of our clients.
Before the iOS 14 update, you could rescue an unoptimized creative through precision targeting.
After the iOS 14 update, Apple removed the safety net of hyper-focused targeting and poor creative results in poor performance.
Therefore, creative has become the biggest lever Facebook and TikTok advertisers have. You can always improve your creative. But there's an upper ceiling on how much you can do in the ad account. That ceiling is getting smaller and smaller every day.
Other ways you can increase your ROAS and profitability are: