What your breakeven ROAS actually is - and why the number your agency uses is almost certainly wrong
Most agency ROAS targets ignore discounting, returns, BNPL fees, fulfilment, and the ad spend itself. Here's what the number should actually look like - and why even getting it right isn't the whole answer.
Open the calculator →
Does your Google Ads reporting align to reality? Is your ROAS matching the same narrative your bank statement shows?
Chances are the measurement in the account isn't fit for purpose and is actively hurting you.
Set & Forgot Top-Line ROAS Targets
Using ROAS to solely understand if the account is profitable or not is a flawed approach (more on this below) - especially if the targets have been set up like in most cases, with one number in mind - gross margin.
For example, if your product costs 35p in every £1 of revenue, your gross margin is 65%, so your breakeven ROAS is 1 divided by 0.65, which is 1.54x. Hit that and you're fine.
It's clean, it's simple, and most importantly, it's wrong.
The problem is that gross margin is not the same as what the business actually keeps after a transaction. There are multiple cost lines between a customer paying and real money hitting your contribution line, and most ROAS targets pretend they don't exist.
The gross margin figure used is often provided by the client from memory rather than pulled from a recent P&L - and it's usually optimistic.
The result is a breakeven target that's set too low. Campaigns "hitting target" are often running at a structural loss nobody has noticed yet.
What Actually Eats Your Revenue
Between a customer placing an order and your business retaining contribution, there are multiple cost categories that compound against each other. Miss any of them and your breakeven number moves materially.
The Erosion Starts Before The Sale Lands
Every discount taken reduces the revenue that order generates, but your cost of goods doesn't change. A £100 product with 35% COGS that sells at a 10% discount now generates £90, but still costs £35 to make or buy. Your gross margin percentage has just dropped from 65% to 61.1% before a single other cost has been counted.
Agency targets built on undiscounted gross margin are overstating the margin available to cover everything else. If you're running persistent discounting - which most DTC brands are - this gap matters.
The Biggest One, And The Most Ignored
Every order returned reduces the revenue that order actually generated. If your return rate is 20%, then for every £90 of post-discount gross revenue, you're only retaining £72 - before anything else has been touched.
In fashion, homewares, and high-AOV categories, return rates of 20–35% are entirely normal. Running a ROAS target built on gross revenue while your real retained revenue is 20–25% lower isn't a rounding error - it's a different business.
Klarna's Cut Comes Off The Top
Buy-now-pay-later providers charge the merchant, not the customer. Klarna, Clearpay, and similar providers take a percentage of gross transaction value - typically 2.5–6% depending on your volume tier and category. That fee is charged on the gross order value, before returns. Even if a customer returns the item, you've already paid the BNPL fee on the original transaction, and partial refunds from providers vary in terms.
If 40% of your orders go through Klarna at a 3.5% fee, that's a 1.4% blended drag on gross revenue - before any other cost has been counted.
Small Percentage, Real Money
Stripe, Shopify Payments, and most other processors charge around 1.4–2.9% plus a small fixed fee per transaction. It's easy to dismiss as negligible - but at scale, and compounding against already-reduced net revenue, it adds up. On a net revenue base that's already reduced by discounts and returns, a 2% processing fee is applied to a smaller number than the full selling price - but it's still a real cost that belongs in the model.
The One Agencies Do Include - Often Inaccurately
Cost of goods sold is the one deduction almost everyone accounts for. The issue is accuracy. COGS figures used in ROAS targets are often based on a rough gross margin percentage provided in an onboarding call, not pulled from a recent P&L. If that number is 5 points out, your breakeven target shifts accordingly.
A second issue: COGS is calculated on full-price selling price, not the discounted revenue. The product cost is fixed regardless of the discount given. This asymmetry is why discounting has an outsized impact on margin - the revenue falls but the cost doesn't.
Fulfilment Isn't Just Postage
Outbound fulfilment typically includes pick and pack labour, packaging materials, postage and carrier charges, warehouse management system fees, and the proportionate share of any 3PL monthly overhead. If you're only using a postage cost in your unit economics, you're understating this line.
Crucially, shipping is incurred on every dispatched order - including those that are subsequently returned. You pay to send the order regardless of whether it comes back.
The Cost Beyond The Lost Revenue
Some brands account for the revenue lost on a return. Fewer account for the cost of processing it - return postage labels, 3PL receiving and inspection, re-packaging, restocking fees, and the admin overhead of processing the refund. For high-return categories this is a meaningful per-order cost when blended across your return rate.
Items That Can't Come Back Into Stock
A proportion of returned units can't be resold at full price - they're damaged, unsellable, or written off. The cost of those units is your COGS on the returned proportion multiplied by your write-off rate. Small in isolation, but it belongs in the model. Fraud chargebacks and payment recovery failures compound this further.
Why A More Realistic ROAS Still Isn't A Silver Bullet
Getting your breakeven ROAS right is necessary. But knowing it - even precisely - doesn't answer the question you actually need to be asking.
Breakeven ROAS tells you the point at which your ad spend generates exactly zero contribution loss per order. What it doesn't tell you is whether hitting that number makes the business viable. Three things it leaves unanswered:
Breaking even on orders isn't breaking even as a business
The variables listed above calculate CM2 - contribution after all variable costs except marketing. What you're forgetting about is the actual spend that then goes into gaining these sales aka - CM3: contribution after your ad spend.
A business hitting its CM2 breakeven ROAS target perfectly isn't profitable if the ad spend required to generate that volume exceeds what CM2 can support. CM3 is the real indicator of whether paid acquisition is generating value or destroying it.
CM3 doesn't account for any additional fixed costs each SKU inherits.
The same unprofitable view from CM2 to CM3 also goes for CM3 to Net Profit.
You can be profitable after variable costs but operationally below water.
The ROAS your dashboard shows isn't the ROAS your business is actually doing
Google Ads data-driven & last-click models both swing in favour of the last-touchpoints heavily, regardless of how impactful these campaigns actually are.
This is compounded even more by PMax - the campaign type that is literally a retargeting engine masked as the catch-all prospecting lifesaver.
On top of this, you're also having modelled data from consent mode fill in the gaps for unconsenting users.
In truth, the attributed revenue & ROAS your ad platform gives you should be taken with a pinch of salt and largely directional - not a definitive source of truth about your media buying.
Lifetime value changes what the floor should be
Breakeven ROAS treats every order as a one-off transaction. For many brands - especially those with strong repeat purchase rates - that's the wrong frame entirely.
In some verticals i.e supplements, you can afford to loss-make on that first transaction on the basis that future revenue makes their overall contribution profitable. This means you can be looser on your tROAS targets because we're not looking at a one-off purchase in silo.
Flip side of it, if your customers rarely repurchase and LTV barely exceeds the first order, running to breakeven is the right constraint. It entirely depends on the business.
As you can see, how much it costs to acquire a new customer per order (whether one-of or over lifetime) is crucial - not just a blanket tROAS target.
Concluding Thoughts
ROAS is a proxy. Treat it like one.
ROAS is a useful signal but a poor decision variable on its own. It compresses important unit economic information into a single ratio that's easy to track but easy to misread - and easy to game at the platform level.
The right way to manage a Google Ads account is to deeply understand your unit-economics. What is my floor? How much can I afford to pay to acquire a new customer and how much contribution does this bring me?
Setting tROAS targets to go cold and using actual back-end sales and margin data allows you to connect the dots properly and adjust based on the P&L, not whether or not the ads account says performance is strong.
Knowing your contribution break-even targets is a great starting point, but don't make decisions based only on the in-platform metrics. Keep the in-platform attributed data for directional only - not gospel.
Free Calculator Suite
Work Out Your Real Numbers
The UK D2C Unit Economics Calculator walks through the full waterfall - from discounted AOV to CM1, CM2, CM3, and net profit - and outputs your breakeven targets at every contribution level (for directional understanding).
Open the calculator →Further reading