Advertising platforms prominently feature ROAS, which is revenue attributed to advertising divided by media spend. This metric is useful, but on its own it does not show whether a campaign makes money.
Understanding ROAS
A campaign spending 1 000 € and attributing 4 000 € in sales reports a ROAS of 4, or 400 %. The calculation is simple: attributed revenue ÷ advertising spend.
Google Ads uses conversion values to measure and optimise the value generated by campaigns and offers bidding strategies based on target ROAS.
Why a ROAS of 400 % can be bad
If products sold leave only a 20 % contribution margin before advertising, 4 000 € in sales generate 800 € of contribution margin against 1 000 € in ad spend. The campaign loses money despite an apparently high ROAS.
CAC measures the cost of a new customer
Customer acquisition cost is acquisition expenditure divided by the number of new customers acquired. Distinguish new customers from orders placed by existing ones: paying 20 € to bring back someone your newsletter might have converted for free is not worth the same as acquiring a new customer.
Calculate advertising break-even
For each major category or average basket, estimate the margin available after product cost, payment processing, packaging and variable expenses. This is the theoretical amount available to split between acquisition and profit.
Example: basket excluding VAT 50 €, product and variable costs 30 €, contribution margin 20 €. If you want to retain at least 8 € on the first order, maximum CAC is 12 €.
Account for repeat purchases
A campaign can tolerate a higher CAC when customers return several times without substantial additional ad spend. But customer lifetime value must be measured, not assumed. Use cohort analysis or at least the second-order rate at three, six and twelve months.
Do not manage advertising using a single figure
Monitor spend, attributed revenue, contribution margin, new customers, CAC and repurchase frequency together. Connect these with our guide to acquisition costs, margins and advertising budgets.