TrendMetric

Ecommerce profit margin and break-even ROAS: the formulas and a worked example

TrendMetric Research1 min de lectura

Before you run an ad, you should know the one number that decides whether it can ever pay for itself: the break-even ROAS. It comes from your margin, so start there.

Gross margin

Gross margin = (selling price − product cost) ÷ selling price. It tells you how much of each sale is left before any other cost.

Net profit per order

  • Selling price
  • − product cost
  • − shipping you pay
  • − payment processing fees
  • − expected refunds and returns
  • = profit before ads

Only after that do you subtract what you pay to get the order: your cost per purchase.

Break-even ROAS

Break-even ROAS = selling price ÷ profit before ads. Above it, each ad dollar returns more than it costs. Below it, you lose money on every order.

A worked example

Say a product sells for $40. Product cost is $12, shipping $5, payment fees $1.50, and you budget $1.50 for refunds. Profit before ads is $20. Break-even ROAS = 40 ÷ 20 = 2.0. If your ads return less than $2 of sales per $1 spent, this product loses money.

Use the profit margin calculator for the margin and the ecom profit calculator for a full order. Then compare the result with demand and competition from your market research: a product can have a healthy margin and still be too crowded to advertise profitably. These calculators are arithmetic on the numbers you type; they do not read catalog data.

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Preguntas frecuentes

How do I calculate ecommerce profit margin?
Subtract the cost of goods from the selling price, then divide by the selling price. Gross margin = (price − product cost) ÷ price.
What is break-even ROAS?
It is the return on ad spend at which you neither gain nor lose money. Break-even ROAS = 1 ÷ margin after product, shipping, and fees, expressed as a ratio.
Why is net profit lower than gross margin?
Gross margin ignores ads, shipping, payment fees, refunds, and returns. Net profit per order includes all of them.
Is a good margin enough to start ads?
No. You also need conversion and ad costs that fit under your break-even ROAS. A high margin with expensive traffic can still lose money.