Metric
Breakeven Point ROAS
The return on ad spend at which an order covers its costs and makes neither profit nor loss.
Formula
BEP ROAS=Revenue per productRevenue per product − Total costs per product
What is 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.
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).
Your BEP ROAS is the ROAS at which the gross profit on a product pays exactly for the ad spend that sold it. By understanding their BEP ROAS, businesses can make informed decisions about their advertising budgets and maximize their return on investment.
How to calculate Breakeven Point ROAS
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 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.
| Revenue | €80 |
|---|---|
| VAT (23%) | €14.96 |
| Revenue without VAT | €65.04 |
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:
| Product cost | €20 |
|---|---|
| Shipping (free shipping threshold surpassed) | €5 |
| 3PL fee | €4 |
| Transaction fee (2%) | €1.60 |
| Our variable costs amount | €30.60 |
BEP ROAS=65.04 ÷ (65.04 − 30.60) = 1.89
| Sales ex VAT | €65.04 |
|---|---|
| − Costs | €30.60 |
| Maximum cost per acquisition | €34.44 |
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.
| Gross profit | €34.44 |
|---|---|
| × BEP ROAS | 1.89 |
| Generated revenue | €65.04 |
| 23% VAT | €14.96 |
| Revenue with VAT | €80.00 |
Why it matters
A ROAS reported with VAT in the revenue and no product costs looks far healthier than it is: in the example, 5.33x on the dashboard is 4.36x once VAT is removed, against a breakeven of 1.89x. Knowing your BEP ROAS shows how much you can spend to acquire an order before it loses money, so you neither overspend on ads nor hold back budget that would still be profitable.
Benchmarks
What is a good Breakeven Point ROAS?
Is your Breakeven Point ROAS higher than 1?
A good Breakeven Point ROAS is typically considered to be 1 or higher. This means that for every dollar spent on advertising, you are generating at least one dollar in revenue to cover both your variable and fixed costs, reaching the breakeven point. A higher Breakeven Point ROAS indicates greater profitability, as it signifies that your advertising efforts are generating more revenue than the costs incurred. It is important to continuously monitor and strive to improve your Breakeven Point ROAS to maximize profitability and make your advertising campaigns more effective.
What is a bad Breakeven Point ROAS?
Is your Breakeven Point ROAS lower than 1?
A bad Breakeven Point ROAS is typically considered to be below 1. This means that for every dollar spent on advertising, you are generating less than one dollar in revenue, resulting in a negative return on investment. It is crucial to identify the factors affecting your ROAS and take corrective actions to improve it. By optimizing your advertising strategies, refining your targeting, and enhancing your conversion rate, you can work towards achieving a positive and profitable Breakeven Point ROAS.
How to improve Breakeven Point ROAS
- Refine your targetingEnsure that your advertising efforts are reaching the right audience. Conduct thorough market research to identify your target customers and tailor your campaigns to their specific needs and preferences.
- Optimize your ad creativesCreate compelling and engaging ad creatives that capture the attention of your target audience. Regularly test and optimize your ad creatives to identify the most effective formats, messages, and visuals.
- Improve landing page experienceOptimize your landing pages so they load quickly and are easy to use. Ensure that the landing page aligns with the ad’s messaging, has clear and relevant content, and includes prominent calls-to-action.
- Monitor and analyze dataRegularly track metrics such as click-through rate (CTR), conversion rate, and cost per acquisition (CPA). Identify underperforming campaigns or keywords and make data-driven decisions to optimize your budget allocation.
- Implement remarketing campaignsTarget users who have previously shown interest in your products or services. Use dynamic remarketing to show personalized ads featuring the products or services users have viewed or added to their carts.
- Optimize your bidding strategyConsider using automated bidding strategies offered by advertising platforms, such as target ROAS bidding or maximize conversions bidding, which optimize your bids based on your desired ROAS or conversion goals.
- Continuously test and iterateTest different variables such as ad copy, visuals, landing page elements, and targeting parameters to identify the most effective combinations, and keep optimizing your campaigns based on the results.
Frequently asked questions
What is Breakeven Point ROAS?
Breakeven Point (BEP) ROAS is the return on ad spend at which the gross profit on an order pays exactly for the advertising that sold it. Below it, each order loses money.
How do you calculate Breakeven Point ROAS?
BEP ROAS = revenue per product ÷ (revenue per product − total costs per product), with VAT removed from revenue. A product selling for €80 including 23% VAT (€65.04 without) with €30.60 of costs has a BEP ROAS of 65.04 ÷ 34.44 = 1.89.
Why remove VAT before calculating ROAS?
Ad spend numbers don’t include VAT, while reported revenue does, so the two are not comparable. In the example, a 5.33x ROAS becomes 4.36x once VAT is removed.
What is a good Breakeven Point ROAS?
A good Breakeven Point ROAS is typically considered to be 1 or higher, meaning every dollar spent on advertising generates at least one dollar in revenue to cover variable and fixed costs.
What is a bad Breakeven Point ROAS?
A Breakeven Point ROAS below 1 means every dollar of advertising generates less than one dollar in revenue, a negative return on investment.
Calculators and further reading
Start your free 14 day trial
Get a demo and see how our unified e-commerce dashboard can help grow your store, profitably.