ADVERTISING ECONOMICS · ROAS THRESHOLDS
Break-even ROAS and target ROAS
answer different questions.
Break-even ROAS is the revenue-to-ad-spend ratio at which contribution after ads is zero. Target ROAS is the ratio needed to leave a chosen contribution after advertising. Neither automatically represents net profit.
A business with a 40% contribution margin before ads has a first-order break-even ROAS of 2.5x. If it wants 15% of revenue left after ads, its target ROAS is 4x. A 3x result lies between these thresholds.
Understand the numbers ↓AdsMath basic metrics check · First-order economics
At 40% contribution margin
2.5×
First-order break-even ROAS2.5×
Desired contribution after ads15% of revenue
Target ROAS4.0×
Covering costs is not the target.
Before fixed overhead and taxes. Illustrative figures.01 / The economics
The two formulas
Let m be contribution margin before ads as a share of revenue, and r the desired contribution after ads as a share of revenue. Use decimals: 40% becomes 0.40.
The calculationBreak-even ROAS = 1 ÷ m
Target ROAS = 1 ÷ (m − r)
Target ROAS = 1 ÷ (m − r)
The target formula requires m − r to be positive. If the desired contribution is equal to or greater than the contribution available before ads, there is no positive advertising allowance in this model.
02 / A worked example
From a €100 order to a ROAS target
Suppose an average €100 order has €60 of variable costs. It leaves €40 before advertising. Spending €40 to acquire the order produces zero contribution after ads: €100 ÷ €40 = 2.5x ROAS.
To keep €15 per order after ads, acquisition can cost €25. The required ratio is €100 ÷ €25 = 4x ROAS. The €15 still needs to contribute toward fixed costs and taxes; it is not automatically take-home profit.
| ROAS | Ad cost per order | Contribution after ads |
|---|---|---|
| 2.5x | €40.00 | €0.00 |
| 3x | €33.33 | €6.67 |
| 4x | €25.00 | €15.00 |
| 5x | €20.00 | €20.00 |
03 / Read the numbers
Define the margin correctly
Use contribution after relevant variable costs, before ads. Product gross margin alone can overstate the advertising allowance if it excludes fulfilment, payment fees or return-related costs. Discounts and refunds must be reflected consistently in the revenue and cost basis.
Use the same basis for your reported ROAS and the threshold calculation. Comparing VAT-inclusive platform revenue with a margin calculated from VAT-exclusive revenue can give a misleading result.
04 / Scope and assumptions
Why a platform ROAS target needs context
Attributed revenue is not proof that advertising caused every reported sale. Attribution windows, returning buyers and overlap between channels can change reported ROAS. This calculation sets an economic benchmark; it does not resolve attribution.
Use a weighted contribution margin for the relevant order mix. If ads sell more low-margin products as spend grows, a fixed threshold based on the old mix may stop being useful.
Scope: These are first-order thresholds using an average margin assumption. They exclude fixed overhead, taxes and future orders. Include lifetime value only through a separate, evidenced contribution and payback model.
05 / The next decision
Which threshold should guide the decision?
Break-even tells you where the first order stops covering its variable costs and ads. Target ROAS tells you whether the order leaves the contribution you require. For budget decisions, compare actual results with both, then test how sensitive the result is to margin and traffic changes.
Put the assumptions together with AdsMath
AdsMath by ScalingROAS combines an advertising economics Simulator with a Decision Guide PDF. Explore how traffic cost, conversion rate, order value and contribution margin affect modeled cost per order and what remains after ads.
€49 one-time. No subscription.
Explore AdsMath Simulator + Decision GuideNeed only ROAS, cost per order and average order value? Use the basic campaign metrics calculator. It does not calculate allowable CPA or contribution after ads.
