Breakeven Point ROAS
Discover the concept of Breakeven Point ROAS and its significance in measuring the effectiveness of your advertising campaigns. Gain insights into how this metric can impact your business's profitability and marketing strategies. Uncover the factors that determine a good or bad Breakeven Point ROAS and explore actionable steps to improve it. This comprehensive guide will empower you to make data-driven decisions, optimize your advertising investments, and achieve a healthier financial position for your business.
What is Breakeven Point ROAS
Many brands today lack a clear understanding of their unit economics on a product level, leading to wasted resources and reduced profits. Although the cost of running online ads has increased considerably, many businesses are still under-spending due to poor understanding of their Break-Even Point (BEP) Return on Advertising Spend (ROAS). By understanding their BEP ROAS, businesses can make informed decisions about their advertising budgets and maximize their return on investment. In this section, we’ll explore the importance of BEP ROAS and how it can help businesses achieve greater profitability.
Let’s take a business that sells a product for €80. Say they acquired an order for €15, resulting in a 5.33x ROAS. However, to truly grasp their profitability, we need to break down the numbers using the Break Even ROAS (BEP ROAS) formula.
First, let’s tackle the VAT issue. Remember, ad spend numbers don’t have VAT, while the reported revenue does. So, we’re comparing two different things. To get an accurate ROAS, we must remove VAT from the revenue. The ad spend without VAT stays at €15.
Now our ROAS is €65.04 ex VAT divided by €15.00 ex VAT. With this adjustment, the real ROAS is not 5.33x, but 4.36x instead.
Next, we need to factor in the costs associated with delivering the product:
Now, let’s calculate the BEP ROAS:
By multiplying the gross profit by the BEP ROAS, we arrive back at our generated revenue. In simpler terms, we cannot spend more on the cost per acquisition than the full gross profit generated for this product.