How to calculate break even ROAS
Here is my 6-step framework for how to calculate break even ROAS.
When you are trying to scale your brand, you need to keep a close eye on profitability.
Revenue and profits do not always grow in line with each other. And if you are not careful, you could scale your budget, become unprofitable and start losing money.
A brilliant way to keep tabs on your profitability is by calculating your break even ROAS.
Then use it as a benchmark to decide when it is time to scale vs when to focus on increasing your profitability before upping your budget again.
The problem is, working this stuff out is not straightforward.
Profitability is not just sales revenue minus ad spend. You also need to factor in the cost of goods sold (COGS).
If you are a location-independent brand owner trying to grow an ecommerce store, but you are struggling to get your head around what breaking even looks like for your brand, then this is for you.
I’ll explain what break even ROAS is, why it matters, and how to calculate break even ROAS for your brand using our profitability calculator.
So what is break even ROAS, and why does it matter?
Break even ROAS is the return on ad spend you need to achieve to avoid losing money from an ad campaign.
And, why does this matter?
Well, if you are like most self-funded location-independent brand owners out there, there is only so long you can lose money on ads before you run out of it.
And running out of money means you will either have to find another way to fund your lifestyle or worse, go back to a traditional 9-5 and have a boss again (eurgh ?).
Now we know what break even ROAS is and why it matters, let me show you how to calculate break even ROAS using our profitability calculator.
How to calculate break even ROAS
Here is an overview of the 6-steps in the how to calculate break even ROAS framework:
- Get your copy of the profitability calculator.
- Enter your average order value into the sheet.
- Enter your blended cost of goods sold (COGS) into the sheet.
- Make sure your percentage cost is below 40%
- Switch tabs and enter your advertising spend.
- Play around with the ROAS target until your net profit says zero.
Next, I will walk you through each step of the how to calculate break even ROAS framework so you can follow along and work out the break even ROAS for your brand.
1. Get your copy of the profitability calculator
The first step in the how to calculate break even ROAS framework is to get a copy of the calculator, which you can edit.
You can do this by downloading the master copy of the calculator, making a copy, renaming it, and saving it in a convenient place in Google Drive.
2. Enter your average order value into the sheet
Now it’s time to enter some of your stats. A quick thing to note – only edit the cells highlighted in peach. If you edit any other cells, it will mess with the formulas, and the sheet will not work.
OK, back to step two of the how to calculate break even ROAS framework.
Enter your average order value in cell B4. In our example, it is €60.
If you do not know where to find your average order value (AOV), you can go to your Google Analytics (GA) dashboard, click conversions, click overview and then you should see your AOV on the screen.
You can also find it on your Shopify dashboard.
3. Enter your blended cost of goods sold (COGS)
The third step in the how to calculate break even ROAS framework is where things might get a bit tricky for some of you.
We need to calculate your blended (a.k.a average) cost of goods sold. And to do this, you will need to know what your business costs are.
By the way, if you don’t know what any of these terms mean, you can hover over each cell in the profitability calculator, where I have written the definitions for you.
OK, let us get back to step #3, where I will walk you through the costs you need to enter into the sheet.
Cost of goods
Enter the average cost to make your products as a percentage of the selling price in cell B7. For example, 20%.
Processing fees
Enter the percentage of the transaction value you pay to process an online payment in cell B8. For example, Stripe charges 1.4% to process each order.
Shipping fees
Now, enter the amount it costs you on average to get your products to your customers in cell B9. For example, this could be €2.50.
Fulfilment fees
Enter the amount charged per order by your fulfilment company in cell B10.
In this example, these cost €2.50. Here is another quick thing to note.
If you are fulfilling your orders yourself because you are new, still enter a value here. You will not want to fulfil your orders for long.
4. Make sure your percentage cost is below 40%
Now you can see the total cost to produce and fulfil an average order in cell B12.
In our example, it’s €17.84, which is 30% of the average order value.
Anything below 30% is sweet.
If it says 40% or over, that is a problem, as you will struggle to profit consistently using Facebook Ads.
So, what can you do if your percentage cost is over 40%?
In that situation, revisit your costs and try to reduce them, or work out ways to increase your average order value.
5. Switch tabs and enter your advertising spend
For the fourth step in the how to calculate break even ROAS framework, you need to click on the profit analysis tab.
And when you have done this, enter your ad budget into cell B3.
In our example, the ad spend is €1.5K.
6. Play around with the ROAS target until your net profit = €0
We are almost there.
Enter a few different ROAS targets in cell B11 until the net profit in cell B13 says €0 (or close to €0).
When your net profit is ~€0, you can see your break-even ROAS in cell B11.
In our example, we break even at 1.32X our ad spend.
Final thoughts
Congratulations, now you know how to calculate break even ROAS, which means you can work out the minimum return on ad spend you need to achieve to avoid losing money from your ad campaigns.
Before I go, here is the big thing I want you to take away from this article.
When you first start with Facebook Ads, take the time to calculate your break even ROAS.
You can use it as a benchmark to decide when it is time to scale vs when you need to focus on increasing your profitability before increasing your budget again.
It will help you avoid increasing your budget and losing a bunch of money.
I hope you found this article helpful. If you want to calculate the break even ROAS for your brand, you can download the tool I used for this article for free using the link below.
Peace ✌️