ROAS 3 but almost zero margin: how do you calculate before scaling?
I am reviewing an account where Meta reports ROAS 3 and at first it looks scalable. The problem: product price is EUR 42, gross margin around 48%, average discount 12%, shipping is partly subsidized and returns are close to 9%. The question is very practical: what formula do you use to decide whether to increase budget? I struggle to defend ROAS 3 as good when the real profit per order is so tight.
I would bring it down to contribution margin per order. Net sale minus tax where relevant, product, payment gateway, subsidized shipping, picking, discount and expected return. Then compare that against CAC, not against ROAS. If contribution margin before ads is EUR 14 and acquiring an order costs EUR 13, you are not scaling: you are buying revenue.
I would separate new customers and returning customers. ROAS 3 on a new customer can be acceptable if they repeat, but ROAS 3 in remarketing to people who were already going to buy does not mean the same thing. Mixing everything usually hides the problem.
In fashion or accessories I include expected return by SKU, not the global average. Some products make money at ROAS 2.5 and others are not worth it at ROAS 5 because of size exchanges, support and discounting.
It helps me to keep three ROAS numbers: platform, net and cash. The platform one is useful for optimizing inside Meta, but the cash ROAS decides budget. Otherwise Meta always looks smarter than the bank account.