Below break-even ROAS, every order bought through advertising loses money; above it, advertising adds profit. It depends on your contribution margin, so two brands with the same ROAS can be in completely different positions.
The common shortcut of 1 ÷ gross margin understates break-even for most D2C brands because it ignores tax, shipping, payment fees and returns. Work it out from contribution per order instead.
Formula
Break-even ROAS = Average order value ÷ Contribution per order
Example
A ₹1,800 order that leaves ₹750 of contribution breaks even at 1,800 ÷ 750 = 2.4 ROAS.
The minimum ROAS and maximum CAC your unit economics can afford, with a full contribution margin waterfall.
Related terms
- ROAS (return on ad spend)ROAS is the revenue attributed to advertising divided by the cost of that advertising.
- Contribution margin (CM1, CM2, CM3)Contribution margin is the revenue left from a sale after the variable costs of making and delivering it.
- CAC (customer acquisition cost)CAC is the total cost of acquiring a new customer, usually marketing spend divided by the number of new customers it produced.
- AOV (average order value)AOV is total revenue divided by the number of orders.
Where this comes up
ROAS is not a business metricReturn on ad spend tells you how the platform sees your campaigns. Contribution margin tells you whether the business is better off. Here is how to run paid media on the second.Part of the growth marketing glossary by Shiva Sharma.