Break-even ROAS calculator

Selling price is what the customer pays for one unit, after any discount that is actually being offered. A price typed at full and sold at twenty per cent off produces a floor that is wrong by twenty per cent in the direction that hurts.

Variable cost per unit is everything that arrives with the unit: the product itself, inbound freight, outbound shipping you carry, payment processing, packaging, per-order handling, sales commission. Everything the business pays whether or not this unit sells stays out — rent, salaries, software, retainers. Those are paid out of contribution, and putting them here produces a floor no campaign can clear.

Profit wanted per unit is optional and is the field that turns a floor into a target. It is the amount of contribution the business wants to keep after the media is paid.

Contribution is the price minus the variable cost: what one sale leaves behind to pay for everything else. At a price of 150 and a variable cost of 60, contribution is 90.

The floor is the price divided by that contribution. Each unit of revenue carries only 0.6 of contribution, so 1.67 units of revenue are needed to produce one unit of contribution — which is exactly one unit of media paid for. Hence a break-even return of 1.6667.

The same arithmetic with a profit requirement subtracted first gives the target. Keeping 30 of profit per unit leaves 60 of contribution to pay the media, and the price divided by 60 is 2.5. That is the return the campaign actually has to deliver for the business to earn what it wanted, and it is a long way from the floor.

The gap between 1.67 and 2.5 is the part of this page worth internalising. Break-even is where the media stops losing money. It is nowhere near where the business starts making any.

Ask for more profit than the unit produces and the target line shows a dash rather than a number. That is not the calculator declining to answer: a profit requirement at or above the contribution cannot be met at any return, because there is no revenue multiple that turns 90 of contribution into 120 of profit. The dash is the answer, and what it says is that the target has to come down, the price has to go up, or the unit cost has to fall.

A median return from an industry report describes the cost structures of the businesses in it. Two advertisers reporting the same return and running different margins are in entirely different situations, and the ratio does not know the difference.

At a 60 per cent contribution the floor is 1.67. At a 30 per cent contribution it is 3.33. At a 15 per cent contribution it is 6.67, and a campaign returning 5 is losing money on every sale while its dashboard reads as a success. No benchmark can tell you which of those you are, and the two boxes at the top of this page can.

This is also why the floor has to be recomputed rather than remembered. Freight moves, supplier prices move, the payment processor changes its rate, the product mix shifts toward something cheaper. A floor calculated a year ago and quoted ever since is a number that was true about a business that no longer exists.

Contribution pays for a great deal before it becomes profit. Rent, salaries, software, the agency, tax and whatever return the owner is entitled to all sit below this line.

A business advertising exactly at its break-even return is buying revenue that pays for its stock and its media and contributes nothing to any of that. It can be the right decision for a period — a launch, a market entry, a product whose first purchase reliably leads to a second — but it is a decision that should be made out loud, with a date on it, rather than arrived at by targeting a number somebody published.

The other thing the floor ignores is what happens after the first sale. A business with genuine repeat purchase can rationally advertise below its single-unit break-even, because the unit being paid for is not the only one that customer will buy. That argument is only honest with a retention curve behind it, and it is the most commonly borrowed justification in advertising.

Use the floor as a boundary and the target as the actual objective. The floor tells you when a campaign has stopped paying for itself, which is the point at which the conversation changes from optimisation to a decision. The target is what the bids, the budgets and the creative work are aimed at.

Recompute both whenever price or cost moves, and compute them per product rather than for the business as a whole wherever the margins differ materially. A single account-wide floor applied to a range with wide and thin margins will quietly approve the wrong campaigns and cancel the right ones.

Finally, keep the arithmetic visible when the target is missed. A campaign short of its target has three routes back — a higher price, a lower variable cost, or more revenue for the same media — and only the third is a media problem. Two of the three sit with somebody who has never seen this page.