Insight

RoAS Is Not
Profit

RoAS of 4.0 or RoAS of 1.8, which is better? The answer depends on unit economics.

Return on ad spend is a ratio: revenue attrbuted to ads, divided by what you paid for them.

It's standard KPI for paid ad performance, but there are shortcomings. It's a metric that knows nothing about your margin, nothing about what a customer is worth, and nothing about how long you wait to get your money back (payback period).

01 — The Trap

A "good" RoAS that loses money

A brand sells a £120 product. Meta reports a RoAS of 4.0. The dashboard is green, the media buyer is pleased and the founder thinks he is scaling.

Gross margin is 45%. After cost of goods, transaction fees and shipping, £38 of that £120 stays in the business. The product is a one-and-done — nobody buys twice. There is no retention curve.

They paid £30 to win the customer and kept £38. That is £8, before operating expenses: the team, the warehouse, the tools and the rent.

In this scenario, the 4.0 RoAS is loss-making. Meta is hitting 'target' every month whilst the business bleeds.

02 — The Proof

Three brands. Three targets. All profitable.

Brand A
0.6x
Scaling profitably
Subscription wellness. 82% gross margin, and by day 90 a customer has spent 4.2 times the first order. They lose money on day one and get it back by day 60. A 0.6 would frighten most founders. This one knows what it means.
Brand B
2.1x
Scaling profitably
Mid-range fashion. 58% gross margin, and two in five customers order again within 45 days. The target is set to that curve, and they know the week it pays back.
Brand C
6.0x
Scaling profitably
High-ticket home goods. Thin margin, almost no repeat purchase. They need 6.0 to break even on the first order, and they say so. The target is built from the economics, not from what sounds good on a call.

Three RoAS targets, ten times apart, and all businesses are growing! That's the power of unit economics.

03 — The Reframe

You are not buying a transaction

The first rule of running paid ads is that you're not buying an order. You're buying a customer.

If that customer comes back, the second order costs nothing to acquire. Nor does the third. The arithmetic changes completely.

Put another way, for many D2C businesses, first-purchase RoAS barely matters.

Repeat customers are why one brand can run profitably at 1.8 while another bleeds at 4.0. The brand at 1.8 has a fat margin, real repeat purchase and a 60-day value that makes the first sale look like a deposit. That business knows what a customer is worth.

04 — The Foundation

Four numbers before you set your RoAS target

01
Gross margin
Revenue minus cost of goods. Without a blended figure across the catalogue you have nothing to work back from, and everything downstream is a guess.
02
Contribution margin
Gross profit minus shipping, fees, processing, discounts and returns. This is the real margin, and the ceiling on what you can pay for a customer.
03
Value at 30, 60 and 90 days
What a customer has actually spent by each of those marks. This tells you whether you bought an order or a relationship, and how long until it pays.
04
Maximum CAC
The most you can pay for a customer and still make your margin. It falls out of the three numbers above, and it sets your RoAS target.

// Your RoAS target is an output of these four numbers.

05 — The System

This is what Fathom solves for

Working these numbers out by hand is miserable, so I built Fathom. It plugs into your Shopify store and your ad accounts and keeps the four numbers current.

Contribution margin
A monthly waterfall from revenue down through cost of goods, shipping, fees and ad spend. Pulled from real orders.
Value by cohort
What a customer is actually worth at 30, 60 and 90 days, split by the channel that brought them in, so you can see which sources send people who stay.
CAC payback
Cost per customer by channel, with the curve that shows how many days it takes each one to turn profitable.
Target RoAS
Based on your margin, your variable costs and your measured repeat rate.
Fathom
A Fathom chart of cumulative gross profit per customer by channel, with a break-even target of Day 90 and a tooltip showing Meta Ads at $176.42, Google Ads at $207.34, Email at $170.44, Organic / Direct at $220.00, TikTok Ads at $174.90 and blended at $190.07
Excerpt from Fathom: CAC payback period
06 — The Takeaway

Know the numbers before you touch the campaigns

The premise is simple: a brand that knows its numbers can scale on paid ads.

RoAS earns its keep as a signal for paid ad algorithms. But it should derived from internal business numbers.

Without your contribution margin you cannot know your breakeven RoAS. And without that, every spend decision is a guess.

RoAS is a front-end number. It should fall out of the back-end ones: margin, customer value, CAC.

Know Your Numbers

Fathom gives you the numbers. I help you act on them.

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