ROAS Truth: Why Platform Numbers Can Deceive You
Why your ROAS looks good but you're still not making money?
Common Problem
Recently, many people have asked me: "Why does my ROAS look good in the ad platform, but when I check my accounts, I don't seem to be making any money, and sometimes I'm even losing money?"
This problem is very common. In fact, you're confusing two concepts: one is the ROAS shown by the advertising platform, and the other is your break-even ROAS. Looking only at the former, you easily fall into a false sense of prosperity, feeling like you have many orders but with thin or even negative profits.
1Is Your Advertising Really Profitable?
First, you need to understand that advertising platforms like Meta or Google only know how much sales revenue you've generated through advertising, but they don't know how much cost you've incurred for this revenue.
Platform ROAS Formula
This is just surface numbers, not representing real profit
But your actual profit needs to subtract many costs:
Key Reminder
After subtracting all these costs, what remains is the money that actually goes into your pocket. If this final result is negative, then no matter how high your ROAS is, you're just working for the platform and logistics companies.
2How to Calculate Break-even Point
To solve this problem, we must first calculate an indicator called break-even ROAS. It means what ROAS you need to achieve to break even.
Core Formula
This is your advertising bottom line
How to Calculate Real Profit Margin?
💰Example
When your ad spend is exactly $50, your ROAS = Sales $100 ÷ Ad Spend $50 = 2. At this point, you break even.
When your ad spend is $25, your ROAS = Sales $100 ÷ Ad Spend $25 = 4. At this point, you make a profit of $50 - $25 = $25. ROAS of 4 is far above the break-even point of 2, which is real profit.
This means your ROAS must be greater than 2 to truly make money!
3ROAS-Based Optimization Strategy
Once you understand the break-even point, you can truly control your business. Based on different ROAS performance, we need to adopt different strategies:
Situation 1: ROAS is Running High
When your ROAS easily reaches 4 or even 5 (break-even point is 2), it means your product has strong competitiveness. At this time, you can test your comfortable pricing range, either by lowering prices to increase conversion rates and order volume, or by raising prices to sacrifice some conversion rate but improve profit margins, ultimately maximizing total profit.
Situation 2: ROAS Near Break-even Point
If ROAS keeps hovering around the break-even point, like 2.2 or 2.3, profits are precarious. At this time, you must optimize from multiple dimensions:
The Magic Effect of Price Increase
Raising price from $100 to $110, single order profit increases from $50 to $60, profit margin rises to 54.5%. New break-even ROAS drops to 1.83, making advertising profitability easier!
Remember: Optimization is a continuous process that requires constant testing and adjustment
4Free Tool Recommendation
To help everyone better calculate their break-even ROAS, I've moved my ROAS Calculator to EcomStack.
This tool can help you:
Master the data, make every penny of advertising spend count