For years, Shopify store owners and e-commerce marketers have leaned heavily on Return on Ad Spend (ROAS) as the primary benchmark for ad performance. It’s a simple, seemingly effective metric: the higher your ROAS, the better your ads must be doing. Right? Not quite.
While ROAS gives a quick view of how efficiently your ads are performing, it leaves out critical parts of your business equation, like profit, scalability, and long-term sustainability. Over-relying on ROAS may be quietly stalling your growth and undermining your ability to build a profitable, enduring brand.
Let’s dive into why ROAS may be doing more harm than good, and what you should be tracking instead.
What is ROAS and How Is It Calculated?
Return on Ad Spend (ROAS) is often treated as the holy grail of advertising metrics in e-commerce.
Formula:
ROAS = Revenue from Ads / Ad Spend
Example:
- Ad Spend: $1,000
- Revenue Generated: $3,000
- ROAS = 3X (or 300%)
On paper, this looks like a win. But there’s a major flaw: ROAS doesn’t tell you how much profit you made. It’s a revenue-centric metric, not a profit-centric one.
The Problem with ROAS: Why It’s Blocking Your Shopify Growth
1. ROAS Ignores Your True Costs
ROAS accounts for revenue, not profit. It doesn’t factor in critical expenses that affect your bottom line:
- COGS (Cost of Goods Sold)
- Shipping & Fulfillment
- Payment Processor Fees
- Returns & Refunds
- Discounts & Promotions
- Customer Service Costs
Example:
Let’s say you run a campaign with the following numbers:
- Ad Spend: $2,000
- Revenue Generated: $6,000
- ROAS: 3X
- Cost of Goods Sold (COGS): $2,400
- Shipping & Fulfillment: $500
- Transaction Fees: $200
- Discounts & Returns: $400
- Total Costs (excluding ad spend): $3,500
- Profit Before Ads: $2,500 ($6,000 – $3,500)
- Net Profit After Ads: $500 ($2,500 – $2,000)
Even with a solid 3X ROAS, the campaign only delivered $500 in actual profit. A few returns, a shipping delay, or rising supplier costs could easily turn that profit into a loss.
2. A “Good” ROAS Is Not Universal
Not all businesses are built the same. For one brand, a 2X ROAS might be wildly profitable. For another, even 4X might not break even.
Examples:
- High-margin digital product: Breaks even at 1.5X
- Low-margin physical product: Needs 3.5–4X to turn a profit
- You must know your breakeven ROAS: the ROAS needed just to cover your costs.
Action Step:
Use a Breakeven ROAS Calculator to set realistic performance benchmarks based on your cost structure.
3. A High ROAS Might Mean You’re Not Scaling
Many Shopify brands obsess over keeping ROAS high, even if it caps their growth.
Let’s compare two real-world strategies:
High ROAS Strategy
- ROAS: 4X
- Revenue: $40,000
- Ad Spend: $10,000
- Profit After Marketing: $5,000
Scaled Spend Strategy
- ROAS: 2.5X
- Revenue: $125,000
- Ad Spend: $50,000
- Profit After Marketing: $15,000
Even though the second strategy has a lower ROAS, it generates 3X more profit. Focusing too much on keeping ROAS high can stop you from scaling and leave real profits on the table.
Key Takeaway:
ROAS is a measure of efficiency, not scale. And growth often comes from profitable inefficiency.
4. ROAS Suffers from Attribution Inaccuracies
ROAS is only as good as the data feeding it, and attribution data is increasingly flawed:
- Meta and Google Ads both take credit for the same conversion
- Shopify’s reports show different revenue figures
- Apple’s iOS privacy updates have reduced tracking accuracy
You may be overestimating your actual return if you blindly trust platform ROAS data.
5. ROAS Doesn’t Measure True Business Growth
Growth isn’t just about making more sales; it’s about increasing profitability over time.
You can have a stellar ROAS and still:
- Lose money after fixed costs (rent, payroll, tools)
- Have cash flow issues
- See flat or declining margins
Conclusion:
ROAS is a partial metric at best. To grow a healthy Shopify brand, you need something more comprehensive.
A Better Metric: Contribution Margin
Contribution Margin (CM) accounts for revenue minus all variable costs, including ad spend.
Formula:
CM = Revenue – COGS – Variable Costs – Marketing Costs
Why Contribution Margin Is Better
- It considers your actual cost structure
- It shows how much money is left to cover fixed expenses and profit
- It tells you if scaling will lead to more profit, not just more revenue
The Untapped Power of Repeat Customers
Even if your ROAS looks weak on first purchases, repeat customers can make the difference. But only if you analyze them properly.
Why Not All Repeat Customers Are Profitable
- Some buy again, but only when discounts are active
- Some never reach breakeven LTV
- Some are loyal but low-value
Cohort Analysis: Understand Repeat Customer Profitability
Cohort Analysis groups customers based on when or how they were acquired, then tracks how they behave over time.
Key Questions Cohort Analysis Can Answer
- How long does it take for new customers to become profitable?
- Are your repeat customers spending more over time?
- Do some acquisition channels lead to more valuable cohorts?
How to Do a Cohort Analysis
1. Gather Your Data
You’ll need:
- Customer acquisition dates
- Order frequency
- Average Order Value (AOV)
- Gross Profit per customer
2. Segment Customers into Cohorts
Segment customers by:
- First Purchase Date (e.g., Black Friday 2024)
- Acquisition Channel (e.g., Facebook vs. Google)
- Product Purchased (e.g., skincare vs. apparel)
- Location (e.g., US vs. UK)
3. Track Cohort Performance Over Time
For each cohort, evaluate:
- Return rate after 3, 6, 12 months
- Profit generated, not just revenue
- LTV vs. acquisition cost
4. Example
January Cohort:
- 600 new customers @ €15 CAC
- 16% made a repeat purchase after 1 month
- Average Profit after 12 months = €31
This means you can afford to pay more for acquisition, knowing your LTV supports it.
Key Metrics to Track Instead of Just ROAS
Rather than relying solely on ROAS, here are five critical metrics that give a clearer picture of your Shopify store’s health and profitability:
- Contribution Margin
Measures how much actual profit you’re making after accounting for COGS, shipping, fees, and ad spend. It reflects the true profitability of each campaign, not just revenue efficiency. - Customer Lifetime Value (LTV)
Estimates how much profit a customer will generate over their entire relationship with your brand. It helps you understand how much you can afford to spend to acquire and retain them. - Repeat Purchase Rate
Tracks the percentage of customers who return to make additional purchases. A higher rate indicates stronger customer loyalty and a healthier retention strategy. - Profitability by Cohort
Groups customers by when or how they were acquired and tracks how profitable each group is over time. This shows which segments are actually helping grow your bottom line. - Average Order Value (AOV)
Measures how much customers spend per transaction. Increasing AOV boosts your margin and allows you to reinvest more aggressively in growth.
How to Improve Repeat Customer Profitability
- Retention Campaigns: Loyalty programs, personalised emails
- Upselling/Cross-selling: Increase AOV on future orders
- Personalisation: Tailored offers based on purchase history
- Subscription Models: Create predictable revenue from repeat buyers
ROAS is a helpful indicator of ad efficiency, but it’s not the ultimate one. Chasing ROAS alone can lead to under-scaling, margin loss, and a false sense of growth.
To build a truly scalable Shopify store, shift your focus to:
- Contribution Margin
- Cohort Profitability
- Customer Lifetime Value
Your ad campaigns, product strategy, and retention efforts should work together, not just to grow revenue, but to grow real, compounding profit.
Need a fresh perspective? Let’s talk.
At 360 OM, we specialise in helping businesses take their marketing efforts to the next level. Our team stays on top of industry trends, uses data-informed decisions to maximise your ROI, and provides full transparency through comprehensive reports.
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