ROAS, CAC and break-even: the numbers that decide profit

What is ROAS?

ROAS (return on ad spend) is the revenue your ads generate divided by what you spent on them.

ROAS = Revenue from ads ÷ Ad spend

If you spend ₹20,000 on Meta Ads and the platform reports ₹60,000 in sales, your ROAS is 3, often written 3x or 300%. It's the most common number in e-commerce advertising because ad platforms report it automatically.

But ROAS measures revenue, not profit. A 3x ROAS can be excellent for one business and a loss for another. To know which, you need your margins.

What is contribution margin and why does it matter?

Contribution margin is what's left from each sale after all the variable costs of delivering it. These are the costs that rise with every order, before ad spend and fixed costs like rent and salaries.

For an Indian online store, variable costs usually include:

• Product cost (manufacturing or purchase price)
• Packaging
• Shipping and courier charges
• Payment gateway fees, typically a small percentage per prepaid order
• Cash-on-delivery charges and the cost of failed or refused COD deliveries (RTO, return to origin)
• Returns and refunds
• Marketplace or platform commissions, if any
• GST effects, depending on how you price and claim input credit

Contribution margin % = (Selling price − Variable costs) ÷ Selling price

How do you calculate break-even ROAS?

Break-even ROAS is the ROAS at which ad spend exactly equals the contribution margin earned. Above it you make money on ads; below it you lose money.

Break-even ROAS = 1 ÷ Contribution margin %

Worked example: a kurta brand

Break-even ROAS = 1 ÷ 0.40 = 2.5x. If ads bring ₹60,000 revenue on ₹20,000 spend (3x ROAS), the contribution earned is ₹60,000 × 40% = ₹24,000, so profit after ads is ₹4,000. At 2x ROAS, the same spend would lose ₹4,000.

Try your own numbers in our break-even ROAS calculator.

What is CAC?

CAC (customer acquisition cost) is how much you spend to win one new customer.

CAC = Total marketing and sales cost for new customers ÷ Number of new customers

Some businesses calculate a simple “paid CAC” using only ad spend; others include agency fees, content, tools and sales salaries for a fuller picture. Be consistent, and be clear which version you're using.

Example: a coaching centre spends ₹45,000 a month on Google and Meta ads and gets 30 new students. Paid CAC = ₹45,000 ÷ 30 = ₹1,500 per student.

What is LTV, and how does it compare with CAC?

LTV (lifetime value) is the total contribution a customer brings over the whole relationship. Using profit, not revenue, gives a more honest figure.

LTV ≈ Average order contribution × Orders per customer over their lifetime

If an average skincare customer orders four times over two years, with ₹500 contribution per order, LTV ≈ ₹2,000. If CAC is ₹800, each customer is worth about 2.5 times what it costs to acquire them. That means you can afford a first-order ROAS below break-even, because repeat orders make up the difference.

These are rules of thumb, not laws. Cash flow matters too: a high LTV that takes two years to arrive can still strain a small business today.

What are MER and POAS?

MER (marketing efficiency ratio), also called blended ROAS, is total revenue divided by total marketing spend across all channels.

MER = Total revenue ÷ Total marketing spend

Ad platforms each claim credit for sales, and their numbers often overlap. Google, Meta and GA4 rarely agree. MER ignores attribution and asks a simple question: is the business as a whole getting enough revenue for what it spends on marketing? It's a useful sanity check on platform-reported ROAS.

POAS (profit on ad spend) replaces revenue with gross profit or contribution: POAS = Contribution from ad-driven sales ÷ Ad spend. A POAS above 1 means ads are adding profit. Some advertisers send profit values instead of revenue to ad platforms so bidding optimises for profit directly.

How does this work for service and lead-gen businesses?

For lead-generation businesses, work backwards from the value of a customer to a target cost per lead.

1. Average contribution per customer: say a home-interior firm earns ₹60,000 contribution per project.
2. Lead-to-customer rate: say 1 in 20 leads becomes a project (5%).
3. Break-even cost per lead = ₹60,000 × 5% = ₹3,000.
4. Set a target well below that, such as ₹1,500–₹2,000, to leave room for overheads and profit.

Track lead quality, not just lead volume. Cheap leads that never convert are expensive. Mark leads as qualified or won in a simple sheet or CRM, and if possible, send those outcomes back to Google Ads and Meta so they optimise for real customers.

How do COD and returns change the maths in India?

Cash on delivery is popular in India, but refused or undelivered COD orders (RTO) carry real costs: forward shipping, return shipping, packaging and sometimes damaged stock.

• Track RTO rate separately for COD and prepaid orders.
• Include expected RTO and return costs in your contribution margin, as in the kurta example above.
• Encourage prepaid orders with a small discount, free shipping or faster dispatch.
• Confirm COD orders by WhatsApp or call before dispatch.
• Count revenue in ROAS only after delivery, or at least adjust for expected cancellations, so ad platforms don't overstate your returns.

How can you improve these numbers?

Small improvements compound. A slightly higher order value, a slightly better margin and a slightly better conversion rate together can turn a loss-making campaign into a profitable one.

What should a simple weekly numbers sheet include?

• Ad spend by channel (Google, Meta, others)
• Orders or leads, and revenue
• Platform-reported ROAS by channel
• MER (total revenue ÷ total marketing spend)
• New customers and CAC
• Average order value and contribution margin
• RTO and return rate
• Repeat purchase rate (monthly)

Even a simple Google Sheet updated every Monday gives you a clearer picture than any single ad dashboard.

Why do ad platforms and your sales data disagree?

Each ad platform counts conversions its own way. Meta might credit a sale to someone who saw an ad yesterday; Google might credit the same sale to a search click last week; GA4 might give it to whichever channel it judges deserves credit under its model. Add the platforms together and you'll often get more sales than you actually made.

• Attribution windows differ, for example 7-day click versus 1-day view.
• Attribution models differ: last click, data-driven and others.
• Modelled conversions fill gaps when tracking is limited by privacy settings.
• Cancelled, returned and RTO orders may still count as conversions in ad platforms.

Use platform ROAS to compare campaigns within a platform, and use MER plus your own order data to judge total performance. If you can, run occasional tests, such as pausing a channel in one region, to see what really changes.

How do you set an ad budget from these numbers?

Work backwards from your goals and margins.

1. Decide your target number of new customers for the month, say 300.
2. Set a maximum CAC you can afford. For a first-order-profitable brand, that's the contribution per first order; for repeat-purchase brands, it can be higher, up to a safe share of LTV.
3. Budget ≈ target customers × target CAC. For example, 300 × ₹500 = ₹1,50,000.
4. Split the budget across channels based on past performance, keeping 10–20% for testing new creatives, audiences or channels.
5. Review weekly: if CAC stays below target, scale gradually; if it rises above target, fix creatives, offers or targeting before adding spend.

For lead-generation businesses, use the ad budget planner: enter your lead goal, expected conversion rate and cost per click to get a monthly and daily budget.

How do these numbers look for different businesses?

Quick formula sheet

Bookmark this table, or put the formulas into a spreadsheet next to your weekly numbers.

What mistakes do advertisers make with these numbers?

• Celebrating a high ROAS without knowing the break-even ROAS.
• Ignoring shipping, COD, payment fees and returns in margin calculations.
• Adding up each platform's reported conversions and double-counting sales.
• Judging repeat-purchase businesses only on first-order ROAS.
• Optimising for cheap leads instead of customers.

Frequently asked questions

Sources and further reading

• Google Ads Help: conversion value and ROAS bidding
• Meta Business Help Center
• Google Analytics Help