How to Calculate Break Even ROAS – Critical ROAS

In today’s article, we’ll discuss how to calculate Break Even ROAS (Return On Ad Spend) – also known as Critical ROAS. This indicator helps determine the return on advertising spend needed to cover all costs and begin generating profit. It’s an important task for every e-commerce or digital marketing team. Let’s see how ROAS works, not forgetting examples and calculations. We’ll also explain how to determine when you’re already in the profit zone and what that means.

Break Even ROAS is the minimum value your ROAS must reach to avoid losses. This means it covers all costs associated with production, marketing, and product sales, but you don’t achieve any profit. You can check your campaigns on platforms like Facebook, TikTok, Snapchat to see if they’re profitable or if you’re losing money.

The return on your breakeven costs is, for instance, 1.5. This means:

• A campaign ROAS higher than 1.5 represents profit.
• A campaign ROAS lower than 1.5 represents loss.
• A campaign ROAS equal to 1.5 represents breakeven.

• Identify all product costs – manufacturing price, packaging, shipping, storage, etc.
• Calculate all marketing expenses – advertising spending, PPC campaigns, social media, banners, etc.
• Utilize the formula to calculate Break Even ROAS

After completing the first two steps, we’ll use the formula provided above to calculate the ROAS = the value at which a campaign, advertisement, set of ads, or ad group becomes profitable.

On our BlueWinston blog, we have an article titled “How to Calculate ROAS.” It contains a calculator for ROAS calculation, which will assist you quickly and reliably with your calculations.

Let’s say you’re selling t-shirts with a manufacturing cost of €10 each. Additionally, you have advertising expenses of €5 per item sold. How do you calculate Break Even ROAS?

• Product Cost (COGS) = €10
• Advertising Cost = €5

We’ll use the formula provided above:

Break Even ROAS = (10€ + 5€) / 5€ = 15€ / 5€ = 3

The Break Even ROAS is 3. To cover all your costs and avoid losses, you need to achieve a value of at least 3. This means that for every €1 you spend on advertising, it must generate €3 in revenue. This way, you’ll cover all your expenses without incurring any losses.

To determine whether we’re already in the profit zone, we can use a simple formula:

If your campaign achieves, for instance, an ROAS of 4, we calculate profitability as follows:

• Break Even ROAS = 3
• Current ROAS = 4

We substitute into the formula:

Profitable ROAS (%) = (4 – 3) x 100 = 1 x 100 = 100%

This means that the campaign is 100% profitable above the Break Even ROAS. Every €1 invested in advertising generates double the amount needed to cover the costs.

• Monitor and analyze current ROAS – Regularly monitor campaigns and check whether the campaign is achieving or exceeding the Break Even ROAS
• Optimize advertising spending – If ROAS is lower than the Break Even ROAS, consider reducing advertising costs or finding ways to increase its effectiveness
• Adjust product pricing or reduce product costs – If the Break Even ROAS is too high, consider adjusting product prices or finding ways to reduce production costs

At BlueWinston, we use Critical ROAS as a technical term for Break Even ROAS. Just like Break Even ROAS, Critical ROAS represents the minimum ROAS value at which revenues equal costs – they break even.

Calculating Break Even ROAS is a key component for effectively managing marketing campaigns. It precisely determines the necessary return on ad spend to cover all costs and begin generating profit. Thorough monitoring of ROAS leads to better financial results and sustainable business growth.

We hope this article has provided you with a clearer understanding of how to calculate and interpret Break Even ROAS. It has explained how this metric can be utilized to improve your marketing campaigns.