Every performance team I have worked with has, at some point, celebrated a ROAS number while finance quietly wondered where the money went. Both sides were right. ROAS is a perfectly good platform metric. It is a poor business metric, and most growth problems I am asked to fix start with confusing the two.
What ROAS leaves out
A 4.0 ROAS means the platform attributed four rupees of revenue to every rupee of spend. It says nothing about:
- Gross margin. A 4.0 on a 35% margin product loses money on the first order. A 2.5 on an 80% margin product prints it.
- Discounts and returns. Platform revenue is usually pre-discount and pre-return. In fashion and beauty, the gap can be 20 to 30%.
- Shipping, payment and fulfilment costs. Cash-on-delivery in India, free shipping thresholds in the US. These are real, per-order costs.
- Incrementality. Some of that attributed revenue would have happened anyway, especially on brand search and retargeting.
None of this is new. The problem is operational: the number the team looks at every morning is the one the platform hands them.
Run the account on contribution margin
The fix is not complicated, but it requires one model and one habit.
The model is a simple per-order contribution calculation by product or category:
| Line | Example |
|---|---|
| Average order value | ₹1,800 |
| Less discounts and returns | −₹270 |
| Net revenue | ₹1,530 |
| Less COGS, shipping, payment fees | −₹780 |
| Contribution before marketing | ₹750 |
From that, your break-even CAC is ₹750, and your break-even ROAS on net revenue is about 2.0. Anything above that line builds the business. Anything below it is buying revenue with margin.
The habit is reviewing performance against that line, weekly, by margin tier. Products with a ₹750 contribution and products with a ₹300 contribution should not share a campaign or a target.
What changes when you do this
Three things tend to happen within the first month.
- Budget moves to the right products. High-margin lines that looked mediocre on ROAS turn out to be the engine.
- Discounting gets more disciplined. Once the team sees what a 20% sitewide offer does to contribution, promotions become a decision rather than a reflex.
- Finance and marketing start using the same language. That alone is worth the effort.
Where to start
Pull last quarter's orders, attach real costs, and calculate contribution by category. Then compare it with what the ad accounts were optimising toward. The gap between those two views is usually the most valuable number in the business.
If you are working through this in your own business, I am happy to compare notes.
Shiva Sharma is a global growth marketing leader and the author of The Movement and Nobody Is Thinking About You. More about Shiva