Glossary · Management
Break-even ROAS
The return on ad spend at which contribution from attributed sales covers the advertising: one divided by the contribution margin rate. The rate is net of payment and delivery costs, returns, discounts and every other variable cost except the advertising.
- Field
- Management
- Examined in
- CBA-DMP
- Learning objectives
- 1
Where the CBA Standards examine it
In the specimen paper
Lamsa Scents, an online perfume retailer in Jeddah, earns a gross margin of 40 per cent on net revenue; after payment, delivery and returns handling, its contribution margin is 25 per cent of net revenue. The revenue below is net of VAT and returns, on the same basis as the margin. Campaign A | spend SAR 8,000 | revenue SAR 40,000 Campaign B | spend SAR 12,000 | revenue SAR 36,000 Campaign C | spend SAR 6,000 | revenue SAR 12,000 Which campaigns lose money once contribution is set against spend?
Answer
B and C, as their ROAS of 3.0 and 2.0 fall below the break-even of 4.0.
Why that is the answer
Return on ad spend divides revenue by spend, but the advertising is paid for out of contribution, not revenue, so the break-even line is one divided by the contribution margin rate: at 25 per cent, every SAR 4 of revenue leaves SAR 1 to cover the media. Campaign B's ROAS of 3.0 looks healthy on a dashboard and loses SAR 3,000, because SAR 36,000 of revenue leaves SAR 9,000 of contribution against SAR 12,000 of spend. Two checks come before the comparison: that the margin is taken after payment, delivery and returns handling, and that the revenue is on the same basis as the margin, net of VAT and returns. Then judge each campaign against the line, not the account's average.
Related terms
- Return on ad spend (ROAS)Management
Attributed revenue divided by the advertising spend it is attributed to. It measures revenue, not profit: attributed sales cover their advertising only when ROAS reaches break-even ROAS, with both on one revenue basis, such as net of VAT and returns.
- Contribution marginFinance
Revenue less variable costs, expressed per unit or in total. It is the amount available to cover fixed costs and generate profit.
- Break-even pointFinance
The level of activity at which total revenue equals total costs, so that profit is zero. It is found by dividing fixed costs by the contribution margin per unit.