Step 1:
Determine your Profit Margin % for your product. The formula for that is…
(Revenue – Cost of Goods) / Revenue x 100 = Profit Margin %
Example:
Let’s say you are selling a pair of shoes for $100. Your cost of goods to source and ship these shoes are $50. So…
($100 – $50) / $100 x 100 = 50% Profit Margin
Step 2:
Divide 1 by your Profit Margin % (as a decimal) to determine your Break Even ROAS…
1 / .5 = 2x Break Even ROAS
What does this mean?
For every $1 you spend on Facebook Ads, you need to bring in $2 dollars in revenue to break even.
Example:
Let’s say you look at your Ads Manager for the day and see a 1.5x ROAS. Since you know 2x is your Break Even ROAS, you can be sure that you are taking a loss. If you see 3x ROAS in Ads Manager, you can be confident that you are generating a profit.
What do I do next?
Calculate your Break Even ROAS for your product(s). If you have categories of similar products that generally have the same Cost of Goods, then you can calculate an average Break Even ROAS for this category of products.
That’s all?
Well, not really. Assuming that you are only advertising on Facebook, you should be paying close attention to your stores revenue generated each day and verifying that your number of orders, revenue (sales) and expense (ad spend) numbers are matching up with what is being reported in Facebook Ads. If you see a big discrepancy in number of orders or revenue generated, you could have an issue with your Pixel tracking. You can always test this with the Test Events Tool.
If you are marketing across multiple channels (Facebook, Google, Tiktok, and Youtube for example) it can be a bit tricky to determine your true ROAS for each platform individually because multiple platforms may attribute the same sale which can make throw off your numbers. In this case, it may be useful to focus on Marketing Efficiency Ratio (MER) which is Total Revenue / Total Marketing Spend.
If you wan’t an expansion of this formula, which takes into account COGS as a % of revenue, fixed costs as a % of revenue and total marketing spend try this:
