Updated:
December 30, 2025
13 min
The ROAS Delusion: Why Your "Successful" Campaigns Are Losing Money
Every week, thousands of ecommerce operators log into their ad dashboards, see a 4:1 ROAS, and pat themselves on the back for running "profitable" campaigns.
Most of them are wrong.
A 4:1 ROAS means you generated $4 in revenue for every $1 spent on advertising. Sounds fantastic-until you remember that revenue isn't profit. That $4 in revenue might carry $2.40 in product costs, $0.60 in shipping, $0.30 in payment processing, and $0.25 in returns. What's left? $0.45 in contribution profit. You spent $1 to make $0.45.
That "4:1 ROAS" is actually destroying value.
This isn't a hypothetical edge case. The median ROAS for brands was 2.04 in 2024. That means half of all ecommerce businesses are operating below a 2:1 ratio-and many of them think they're doing fine because they're "hitting their ROAS targets."
The problem isn't that ROAS is a bad metric. It's that ROAS, used in isolation, actively misleads. It measures revenue efficiency without considering whether that revenue generates profit. A luxury watch store with 80% margins and a dropshipping phone case shop can both hit a 2.87:1 ROAS. One's making bank, the other's barely covering costs.
ROAS tells you almost nothing without context. And the operators who optimise for ROAS without understanding its relationship to actual profitability are building businesses on foundations of sand.
Why ROAS Benchmarks Are Worse Than Useless
Open any marketing blog and you'll find articles proclaiming "4:1 is a good ROAS" or "aim for 400% return." This advice is not just unhelpful-it's dangerous.
A good ROAS typically ranges 2:1-4:1, meaning you generate $2-4 in revenue for every $1 spent on advertising. But that range is so broad it encompasses both thriving businesses and ones bleeding cash. A 3:1 ROAS could be exceptional or catastrophic depending on your margin structure.
Consider two Australian ecommerce businesses:
Business A: Premium Skincare
Average Order Value: $120 AUD
Gross Margin: 72%
Contribution Margin (after shipping, processing): 55%
Break-even ROAS: 1.82:1
At 3:1 ROAS, this business generates $0.65 in profit for every $1 spent on ads. Excellent economics.
Business B: Consumer Electronics
Average Order Value: $180 AUD
Gross Margin: 28%
Contribution Margin (after shipping, processing): 18%
Break-even ROAS: 5.56:1
At 3:1 ROAS, this business loses $0.44 for every $1 spent on ads. The same ROAS that's printing money for Business A is destroying Business B.
This is why chasing benchmark ROAS is negligent. The only benchmark that matters is your own break-even ROAS-the point where ad revenue covers your actual costs.
Calculating Your Break-Even ROAS
Your break-even ROAS is determined by your contribution margin ratio. The formula is simple:
> Break-Even ROAS = 1 ÷ Contribution Margin %
If your contribution margin is 40%, your break-even ROAS is 2.5:1. Every dollar above that threshold generates profit; every dollar below destroys it.
Most ecommerce operators don't know their contribution margin with precision, which means they don't know their break-even ROAS, which means they're flying blind on the single metric they use to make budget decisions.
This is why so many businesses scale their way into bankruptcy. They hit their "target ROAS," increase ad spend, and watch cash disappear faster than revenue grows.
The Profit-Adjusted ROAS Protocol: A Framework for Real Optimization
Standard ROAS optimization asks: "How do I get more revenue per ad dollar?"
The right question is: "How do I get more profit per ad dollar?"
The Profit-Adjusted ROAS Protocol is a systematic framework for transforming ROAS from a vanity metric into an actual profitability driver. It operates on three interconnected layers: calculation, calibration, and optimisation.
I developed this protocol after seeing too many brands celebrate ROAS numbers that were actually destroying margin. They'd hit 4:1 ROAS on a 25% margin product and call it success-without realising they were barely breaking even. The protocol forces margin-aware measurement that reveals true advertising profitability.
Layer 1: Calculation - Establishing True Performance Baselines
Before optimising anything, you need accurate measurement. Most ecommerce businesses measure ROAS incorrectly-or more precisely, they measure ROAS accurately but interpret it incorrectly.
Step 1: Calculate contribution margin by product/category.
You cannot set meaningful ROAS targets without knowing your margins. For each major product category, calculate:
Gross margin (revenue minus COGS)
Subtract shipping cost per order
Subtract payment processing (typically 2-3%)
Subtract return cost allocation (return rate × cost per return)
Subtract packaging and handling
What remains is your contribution margin-the amount available to cover advertising, fixed costs, and profit.
Step 2: Determine break-even ROAS by category.
Different products require different ROAS thresholds. A 65% margin product breaks even at 1.54:1 ROAS. A 25% margin product breaks even at 4:1 ROAS. Treating these identically-running the same ROAS targets across your entire catalogue-guarantees you're over-investing in low-margin products and under-investing in high-margin ones.
Step 3: Calculate profit-adjusted ROAS (pROAS).
Standard ROAS: Revenue ÷ Ad Spend Profit-Adjusted ROAS: Contribution Profit ÷ Ad Spend
If a campaign generates $10,000 in revenue at $2,500 ad spend, standard ROAS is 4:1. But if that revenue carries 35% contribution margin, contribution profit is $3,500, and pROAS is 1.4:1.
pROAS reveals whether you're actually making money, not just moving product.
Layer 2: Calibration - Setting Targets That Drive Profitability
With accurate calculations in place, the next challenge is setting appropriate targets across campaigns, channels, and products.
The Tiered Target Framework:
Not all advertising serves the same purpose. Acquisition campaigns, retention campaigns, and brand campaigns have fundamentally different economics and should have different ROAS expectations.
Campaign Type | ROAS Expectation | Rationale |
|---|---|---|
Cold Acquisition | 1.5-2.5x | Acquiring new customers is expensive; LTV justifies lower initial returns |
Warm Retargeting | 4-8x | Re-engaging known prospects should convert efficiently |
Customer Retention | 8-15x | Existing customers already know you; conversion should be cheap |
Brand Awareness | 0.5-1.5x | Not direct response; measured differently |
Applying the same ROAS target across all campaign types is a fundamental error. Subscription businesses can tolerate lower initial ROAS because customers generate recurring revenue-they might accept 1.2:1 on acquisition knowing the backend value justifies it. One-time purchase businesses need higher immediate returns.
The LTV Multiplier:
If your customers repurchase, you can afford lower first-order ROAS. The adjustment formula:
> Acceptable First-Order ROAS = Break-Even ROAS ÷ (1 + Expected Repeat Purchase Rate)
If your break-even ROAS is 3:1 and 40% of customers make a second purchase, your acceptable first-order ROAS drops to 2.14:1. You're betting on backend revenue to complete the payback-a reasonable bet if your retention data supports it.
The Margin-Weighted Portfolio:
Rather than setting a single ROAS target, set targets that weight toward high-margin products. If your portfolio is:
30% high-margin products (60% CM, break-even 1.67:1)
50% medium-margin products (40% CM, break-even 2.5:1)
20% low-margin products (20% CM, break-even 5:1)
Your blended target should reflect margin-weighted contribution, not equal-weighted revenue. Pushing more volume through high-margin products at lower ROAS generates more absolute profit than pushing equal volume across all products at a "better" blended ROAS.
Layer 3: Optimisation - Systematic Improvement Across the Funnel
With accurate measurement and appropriate targets, optimisation becomes a systematic process rather than random experimentation.
Channel-Level Optimisation:
Search campaigns deliver the highest ROAS at 5.17:1, significantly outperforming other campaign types due to high-intent user behaviour. This is consistent across most ecommerce verticals-people searching for products are closer to purchase than people scrolling social feeds.
The strategic implication: maximise search capture first, then layer on social for scale. Many businesses invert this, dumping budget into social acquisition while leaving search demand uncaptured.
Channel ROAS benchmarks for Australian ecommerce:
Channel | Typical ROAS Range | Strategic Role |
|---|---|---|
Google Search (Branded) | 8-15:1 | Capture existing demand |
Google Search (Non-Branded) | 3-6:1 | Acquire intent-driven traffic |
Google Shopping | 4-8:1 | Product-level acquisition |
Meta (Prospecting) | 1.5-3:1 | Cold audience scale |
Meta (Retargeting) | 5-10:1 | Warm audience conversion |
TikTok | 1-2.5:1 | Discovery and awareness |
The average eCommerce ROAS sits at 2.87:1, meaning you get $2.87 back for every advertising dollar spent. But this average obscures massive channel variance. Optimising at the channel level-rather than blending everything together-reveals where incremental budget generates the highest marginal return.
Creative Optimisation:
ROAS improvement isn't just about where you spend-it's about what you say. Creative fatigue is real; expect Meta performance to degrade 15-30% every 2-3 weeks on the same creative. High-ROAS operators maintain creative testing velocity of 10-20 new concepts per month.
The creative-ROAS connection is often underestimated. A compelling ad reduces CPM (more engagement means lower costs), improves CTR (more clicks per impression), and increases conversion rate (better-qualified traffic). The compound effect can double ROAS on the same budget.
Landing Page Optimisation:
The ad gets the click; the landing page gets the conversion. Misaligned landing pages-where the ad promises one thing and the page delivers another-destroy ROAS by inflating click costs without generating sales.
Every major campaign should have dedicated landing pages that:
Continue the ad's visual and messaging themes
Remove navigation distractions
Present a single, clear call-to-action
Include social proof near the purchase point
Load in under 3 seconds (especially mobile)
A 20% improvement in landing page conversion rate is equivalent to a 20% improvement in ROAS-with no additional ad spend.
The Platform Reality Check: What Each Channel Actually Delivers
Understanding channel-specific ROAS patterns helps set realistic expectations and allocate budget intelligently.
Google Ads
Google Ads leads with average ROAS of 13.76 according to some analyses, though this figure includes branded search, which inflates the overall number. More realistic expectations:
Branded Search: 10-20:1 (capturing existing demand)
Non-Branded Search: 3-6:1 (acquiring new customers)
Shopping: 4-8:1 (product-specific intent)
Performance Max: 2.5-4:1 (automated mixed placements)
Google's strength is intent capture. People searching for "buy [product]" are close to purchase. The challenge is volume ceiling-once you've captured available search demand, you can't simply spend more to get more.
Meta (Facebook/Instagram)
Meta remains the primary scale engine for most ecommerce brands, but performance has compressed significantly since iOS 14.5. Realistic 2025 benchmarks:
Prospecting (Cold): 1.5-3:1
Retargeting (Warm): 5-10:1
Lookalike Audiences: 2-4:1
Broad Targeting: 1.5-2.5:1
Meta's attribution has become increasingly unreliable. Platform-reported ROAS often overstates actual performance by 20-50%. Smart operators triangulate with post-purchase surveys, holdout testing, and multi-touch attribution models.
TikTok
TikTok is still emerging as an ecommerce channel, with highly variable results:
Average ROAS: 1-2.5:1
Top Performers: 3-5:1
Common Pitfall: High view volume, low conversion
TikTok works best for visually engaging, demonstration-friendly products targeting younger demographics. It's a discovery platform-people aren't there to buy, so conversion requires exceptional creative that entertains while selling.
Amazon Ads
For brands selling on Amazon, in-platform advertising delivers:
Sponsored Products: 4-8:1
Sponsored Brands: 3-6:1
Sponsored Display: 2-4:1
Amazon's advantage is transaction proximity-shoppers are already in buying mode. The disadvantage is that you're building Amazon's business, not your own. Customer data stays with Amazon.
The 60-Day ROAS Transformation Playbook
Moving from ROAS-as-vanity-metric to ROAS-as-profitability-driver requires systematic implementation. Here's a phased approach for Australian ecommerce operators.
Phase 1: Foundation (Days 1-20)
Week 1: Margin Mapping Calculate contribution margin for every product category. Most businesses discover their margins are lower than assumed-shipping and payment processing are often underestimated.
Week 2: Break-Even Calculation Determine break-even ROAS by category. Document the spread-you'll likely find some products break even at 2:1 while others require 5:1 or higher.
Week 3: Current State Audit Pull ROAS by channel, campaign, and product category. Identify where current performance sits relative to break-even thresholds. Flag campaigns running below break-even.
Phase 2: Triage (Days 21-40)
Week 4: Kill or Fix Decisions For campaigns below break-even:
Is the issue targeting? (Wrong audience)
Is the issue creative? (Weak ads)
Is the issue product? (Low-margin items)
Is the issue fundamental? (No viable path to profitability)
Pause campaigns with no viable path. Restructure campaigns with fixable issues.
Week 5: Target Recalibration Replace blanket ROAS targets with tiered targets by:
Campaign type (acquisition vs. retention)
Product margin tier
Customer LTV segment
Week 6: Budget Reallocation Shift budget from below-break-even campaigns to above-break-even campaigns. This sounds obvious, but most businesses leave bad money running indefinitely.
Phase 3: Optimisation (Days 41-60)
Week 7: Creative Velocity Launch 10-15 new creative concepts across top channels. Test systematically: different hooks, different formats, different value propositions. Winning creative compounds ROAS improvements.
Week 8: Landing Page Alignment Audit landing pages for top 10 campaigns by spend. Improve alignment with ad messaging. Implement conversion rate optimisation tests.
Week 9: Attribution Validation Implement holdout testing on largest channels. Turn Meta off for 1 week; measure true incrementality. Compare platform-reported ROAS to actual lift. Adjust targets based on validated performance.
Week 10: Systematisation Document target ROAS by segment. Establish weekly review cadence. Create automated alerts for campaigns drifting below break-even.
The Marketing Efficiency Ratio: Beyond Single-Channel ROAS
Channel-level ROAS is necessary but insufficient for business-level decisions. The metric that captures overall marketing efficiency is the Marketing Efficiency Ratio (MER).
> MER = Total Revenue ÷ Total Marketing Spend
MER includes all marketing costs-not just paid advertising, but also email platform fees, influencer payments, content production, agency retainers, and software subscriptions. It shows the complete picture of marketing's contribution to revenue.
Why MER matters alongside ROAS:
ROAS is gameable; MER is not. You can improve Meta ROAS by attributing more conversions to Meta (within the platform's generous attribution window). You cannot game MER-total revenue divided by total spend is what it is.
ROAS creates channel silos; MER encourages portfolio thinking. Optimising each channel's ROAS in isolation can decrease overall efficiency if channels cannibalise each other. MER forces you to consider the entire marketing ecosystem.
ROAS ignores non-paid efforts; MER includes everything. A strong organic search program reduces reliance on paid acquisition, improving MER even if it doesn't directly affect ROAS.
Healthy MER benchmarks for Australian ecommerce:
Struggling: Below 3:1
Acceptable: 3:1 to 5:1
Strong: 5:1 to 8:1
Exceptional: Above 8:1
Businesses at 8:1+ MER typically have strong organic traffic, effective email programs, and loyal repeat customers. They've escaped the paid acquisition hamster wheel.
The Contribution Reality
The Contribution-Adjusted North Star
ROAS is a useful operational metric when properly calibrated. But it's not your north star-contribution profit per dollar of marketing spend is.
The formula that should guide every advertising decision:
> Contribution ROAS = (Revenue × Contribution Margin %) ÷ Ad Spend
This single metric captures:
Revenue generation (numerator component)
Margin quality (contribution margin adjustment)
Spending efficiency (denominator)
A campaign generating 2:1 ROAS on 60% margin products (Contribution ROAS: 1.2:1) is more valuable than a campaign generating 3:1 ROAS on 20% margin products (Contribution ROAS: 0.6:1). Standard ROAS ranking reverses the truth.
When you optimise for Contribution ROAS, you automatically:
Favour high-margin products
Avoid unprofitable campaigns
Build sustainable unit economics
Scale what actually makes money
The businesses that compound in 2025 won't be those with the highest ROAS. They'll be those who understand that ROAS is just one piece of the puzzle-and that the real question isn't "what's a good ROAS?" but "what ROAS do I need to hit my profit goals?"
Answer that question. Then optimise relentlessly toward it.
Everything else is vanity.
