How to calculate profitable ROAS when returns and fulfilment costs matter
By AdminLast reviewed
Return on ad spend (ROAS) is simple: revenue divided by advertising spend. A £5,000 campaign that drives £20,000 in tracked revenue has a 4.0x ROAS. The problem is that revenue is not profit. For an ecommerce business, a seemingly excellent ROAS can still lose money once product cost, returns, payment fees and fulfilment are included.
Start with contribution, not turnover
For a practical decision, estimate the contribution left after the costs that increase with each order:
Net sales - cost of goods - returns/refunds - payment fees - pick, pack and delivery subsidy = contribution before advertising
If £100 of sales normally leaves £25 before advertising, your break-even ROAS is 4.0x: you can spend up to £25 to obtain £100 of revenue. If paid revenue has a higher return rate, lower average order value or more discounted products than the rest of the site, use paid-channel assumptions rather than the company-wide average.
Use the ROAS Calculator for the headline calculation, then record the cost assumptions next to the result. That makes the figure explainable in a trading meeting.
A worked example
Imagine a campaign generates £12,000 in net sales from £2,000 spend: 6.0x ROAS. The products cost £6,000, expected returns are £600, payment fees are £240 and fulfilment subsidy is £360. Contribution before advertising is £4,800. After the £2,000 ad spend, the campaign contributes £2,800.
In this case it is profitable. But if the campaign had generated £8,000 from the same spend, its 4.0x ROAS would only just cover advertising at these assumptions. It would not cover overhead or leave room for error.
Use ROAS in context
ROAS is more useful when compared with a break-even target, a margin-adjusted target by category, and the incrementality of the activity. Brand search, remarketing and prospecting rarely deserve the same target. Do not turn off a campaign solely because its platform ROAS is lower than another campaign; the lower figure may be reaching customers the other campaign would never have acquired.
What to do next
Set a documented break-even ROAS for each major product group. Revisit it after a meaningful change to freight, pricing, returns or discounting. For a quick sanity check of sale pricing, use the relevant ecommerce calculators before briefing promotions.