Hi there, it’s Matthew Larsen from Ultra Growth Marketing. Today, we are going to talk about how to determine your breakeven ROAS, which is the minimum ROAS (return-on-ad-spend) that you will need to get on ad platforms such as Facebook and Google without losing money. This is an important number to know because if you don’t, you won’t know whether you are making money or not. This makes it a worthy topic to discuss, and show you how to find yours.
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Why Breakeven ROAS is So Important
ROAS stands for return-on-ad-spend and breakeven refers to the point where you are “breaking even,” meaning you are not making or losing any money, with a net profit of zero dollars.
This number is so important to know because it is what will determine whether or not your advertising campaigns are “working” or not.
In the simplest terms possible, any result below your breakeven ROAS is a failure, and any number above your breakeven ROAS is a success. If you do not know this number, you will be operating “blindly” and you will not know whether your advertising is working or not. If you don’t know if it is working or not, you will be in a bad spot because you could be either losing a lot of money and not realize it, or you could be making money and not realize it.
How to Find ROAS
To determine the formula for ROAS, you simply divide your revenue generated by your ad spend.
For example, if you spent $1,000 and generated $3,000 in revenue, you would have a 3x ROAS. Here is the math on that:
ROAS = Revenue/Ad Spend
3x ROAS = $3,000/$1,000
How to Find Breakeven ROAS
The formula for breakeven ROAS is the inverse of the formula to determine gross margin. The easiest way to determine our breakeven ROAS is as follows:
Breakeven ROAS = 1/[(Revenue-Cost of Goods)/Revenue]
Here is an example using 50% gross margins. The product sells for $100 and costs us $50.
Breakeven ROAS = 1/[$100-$50)/$100]
Breakeven ROAS = 1/($50/$100)
Breakeven ROAS = 1/0.5
Breakeven ROAS = 2x
It is very important to determine your breakeven ROAS before you ever start advertising. First, you must determine your revenue and cost of goods to get your gross margin, and then you can sub those numbers into the breakeven ROAS formula.
If you already know your gross margin, you can skip a few of the steps and use this formula:
Breakeven ROAS = 1/(Gross Margin)
Breakeven ROAS is a very important number for you to know. It is so important because any ad campaign above your breakeven ROAS is good and should be expanded, and any ad campaign below your breakeven ROAS is bad and should be turned off or reworked. For this reason, it is crucial that you know this number because if you don’t, you won’t know what you should do with your ad campaigns.
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