ROAS isn't profit. How to tell if your e-commerce ads really pay off
A ROAS of 6 looks great–but did those sales actually make you money? In e-commerce, these are two completely different questions – and many sellers only discover that when they close the month.
In this article, we explain why ROAS alone can be misleading, how to calculate the profitability threshold for your products, and how to run campaigns so that profit counts, not just revenue.
In this article:
- why ROAS isn’t the same as profit,
- what costs to add to advertising,
- how to calculate the profitability threshold (break-even ROAS),
- how to set up campaigns for margin.
Why doesn’t a good ROAS always mean profit?
ROAS tells you how much revenue each zloty spent on ads brought in. It's a useful metric, but it doesn't account for product costs, commissions, shipping or returns. That's why two products with identical ROAS can deliver completely different financial results.
You can have a great ROAS and still sell below zero.
Which costs eat into your margin along the way.
Before an ad starts paying for itself, the revenue from each sale has to cover all the costs along the way:
- the cost of buying or producing the goods,
- marketplace commission and transaction fees,
- shipping and packaging,
- returns and complaints,
- and only at the end – the ad cost.
What's left after deducting costs other than ads is margin available for advertising. It determines how much you can spend on campaigns without losing money on sales.
How to calculate your ad profitability threshold.
The maths behind your advertising break-even point–your break-even ROAS–is simple:
Formula:
break-even ROAS = 1 ÷ margin available for advertising (in %)
If after deducting product cost, commission and delivery you’re left with 25% of the price, your profitability threshold is a ROAS of 4. Below that, every ad-driven sale is a loss – even if the report is glowing green.
Example: same ROAS, completely different result.
Take two products at $27, both sold through ads at ROAS 5 (i.e. $5 of ads per $27 of sales):
- Product A – purchase cost $14, commission $3, shipping $3. That leaves $8, after ads +$3 profit.
- Product B – purchase cost $19, commission $3, shipping $3. That leaves $3, after ads −$3 loss.
Same ROAS, same budget – yet one product makes money and the other loses it. Product A's profitability threshold is a ROAS of 3.3, while product B's is as high as 10.
How to run campaigns for margin.
- Add product costs – without the purchase price, you can’t calculate margin.
- Set your profitability threshold – separately for product groups with different margins.
- Split your catalog into segments – high-margin products can have a lower ROAS and still make money.
- Set a minimum ROAS or margin in your campaigns – and turn off offers that fall below the threshold.
- Look at results after returns – especially in fashion and electronics.
In Senvio, all you need to do is add your product costs and set a minimum profitability threshold – the system makes sure the budget goes where sales really pay off.
Most common mistakes in evaluating ads.
- a single target ROAS for the whole store,
- judging campaigns by revenue alone,
- ignoring returns and commissions,
- scaling low-margin bestsellers,
- no up-to-date purchase costs.
Summary.
ROAS tells you how much you sell. Margin tells you how much you earn. Only when campaigns factor in product costs, commissions, shipping and returns does advertising start working for profit – and the conversation shifts from “how much did we sell?” to “how much did we earn?”.
Driving turnover is easy. The real skill is driving turnover and earning on it.