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Before jumping into paid advertising and especially before running a big sale, it’s imperative that you calculate your ROAS threshold in relation to yourmargins. Particularly during a sale, determining what sort of threshold forROAS you will need to aim to remain above is very helpful.
Historically, when ecommerce stores have bigsales (i.e. anything over 25%), our agency usually sees a substantial boost in ROAS and sales during the sale. In most cases, it makes a lot of sense to increase ad spend during the sale to capitalize on the great ad performance that a sale will elicit. This is why you must know your ROAS threshold. Knowing this will be necessary in order to accurately project thebudget for the sale.
Not sure what any of this means?🤔Read on and we will break it all down for you, as well as give you an exact formula so you can calculate the ROAS threshold foryour biz!
Here is an example based on a clothing store:
Let's say that for COGS (cost of goods sold), it costs them $50 to produce a $200 sweater. To “breakeven” on that sweater, they would need to spend no more than $150 on advertising to generate a sale. Because it takes $50 to produce that sweater, everything else (the remaining $150 revenue generated from the sale) is all profit. So, if we spend $150 on ads to generate that one sale, they are still “breaking even” on COGS ($50). This equates to a 1.33 ROAS needed for breakeven.
Now, let's adjust these numbers a bit and look at profit possibilities. Let's say they only spend $60 to generate a sale for, again, that sweater that retails for $200 and cost $50 to produce. This equates to a 3.33ROAS with ad spend:
$200 revenue/$60 cost per purchase = 3.33 ROAS
In this second example, the clothingstore is profiting and is well above breakeven. They spent $60 to get a sale for a product that cost $50 to produce. This equates to $90 profit for this sale, which is great!
Some of our clients give our agency the green light to continue toscale, or increase spend, as long as we're a little bit above their breakeven ROAS, where they’re making a good profit. For example, if a client’s breakeven ROAS is 2, we know that we need to take the foot off the gas with ad spend when it’s hovering just at a 2. But if we’re at a 2.5 or 3+ ROAS or well above that, then we can continue scaling. We obviously don’t want to scale fully at breakeven, but at least above it because that means they’re making a profit.
Want to input your own numbers to calculate your breakeven ROAS? Here is the formula to follow:
MSRP - COGS = Profit (or the max we can spend on ad spend to breakeven on a single sale)
Breakeven cost per purchase is when we spend the above profit amount to get a sale. We can use this breakeven cost per purchase to determine the breakeven ROAS (aka the ROAS we want to aim to at least remain above in the account).
Revenue / Breakeven Cost Per Purchase = Breakeven ROAS
Keep in mind that if you spend less than the breakeven cost per purchase with ad spend, then you'remaking a profit with the ads. 🙌🏻
We hope it’s clear to see that an ecommerce store cannotscale or successfully calculate ad spend budget for a sale without knowing this important number. What are you waiting for? Grab your calculator and figure out your breakeven ROAS today!