Unit economics
ROAS, MER, CAC and contribution margin — which number drives which decision.
Ad dashboards show you revenue, not cost. They do not know your cost of goods, your return rate, or your shipping bill. That is why an account that looks good in the dashboard can be losing money. Know which number you are looking at before you act on it.
Core definitions
| Metric | Formula | What it tells you |
|---|---|---|
| ROAS | platform revenue ÷ platform spend | A channel's own claim |
| MER | total revenue ÷ total marketing spend | The real efficiency of the business |
| CAC | marketing spend ÷ new customers | Cost to acquire one customer |
| AOV | revenue ÷ orders | Average basket |
| LTV | lifetime gross profit per customer | The ceiling on what you can pay |
| Contribution margin | (revenue − COGS − shipping − fees − returns) ÷ revenue | What is left for advertising |
The denominator of MER includes everything that goes to marketing: agency fees, tool subscriptions, production costs. ROAS only counts media spend. That gap is the single reason most brands believe they are profitable.
Break-even threshold
Do not pick a target ROAS by instinct. Derive it from your contribution margin.
break-even ROAS = 1 ÷ contribution margin
| Contribution margin | Break-even ROAS | Reading |
|---|---|---|
| 20% | 5.0x | Very hard to grow on paid |
| 35% | 2.9x | Tight but workable |
| 50% | 2.0x | Healthy room to move |
| 65% | 1.5x | Suited to aggressive scaling |
A 2.0x ROAS is excellent for one brand and bankruptcy for another. Benchmark against your own margin, not an industry average.
The same formula applies to MER. Every point above your break-even MER is profit left in the business.
Which number drives which decision
| Decision | Number to check | Cadence |
|---|---|---|
| Should I kill this creative? | CPA and CTR at the creative level | Daily |
| Should I raise this campaign's budget? | Campaign ROAS and volume | Every 2–3 days |
| Should I raise total budget? | MER and contribution margin | Weekly |
| Should this channel stay in the mix? | Incremental contribution | Monthly / quarterly |
The critical error is making a business decision with a platform metric. Platform ROAS is a tactical signal — it tells you which ad beats another. MER tells you how much you should be spending at all.
How much you can lose on the first order
In categories with high repeat rates, running below break-even on the first order can be rational. LTV sets the limit:
acceptable CAC = gross profit per customer (12 months) × target payback share
If your cash cycle is short (you turn inventory quickly), you can push that share higher. If it is not, a CAC target leaning on LTV produces a cash crunch rather than growth.
Three common mistakes
- Summing platform revenue. Meta and Google each claim the same sale; add them and you will see more revenue than you actually made.
- Ignoring returns. In apparel, returns can pull contribution margin down by 10–15 points. Use revenue net of returns.
- Not separating new from repeat customers. ROAS computed on blended revenue is inflated by existing customers buying again, creating an illusion of growth.