Ask a founder what ROAS target they run to and you will usually get a confident answer. Ask where the number came from and the confidence drops.
In most businesses it was set early, by someone who has since left, at a level that felt safe at the time. It has survived every subsequent change to pricing, product mix, shipping costs and returns, because nobody has had reason to revisit it.
That number is now quietly setting a ceiling on how fast you can grow.
Start with contribution margin
Contribution margin is what a sale leaves behind after the costs that vary with it:
- Cost of goods
- Payment processing
- Shipping and fulfilment
- Packaging
- Expected returns
Not rent, not salaries, not software. Only what changes when one more order happens.
A worked example. You sell a product for €80. Cost of goods is €28. Processing is €2. Shipping and packaging come to €7. Your return rate is 12% and returned items are resellable, so the effective cost of returns is roughly €4 per order once handling is included.
Contribution margin: €80 − €28 − €2 − €7 − €4 = €39, or 49%.
That €39 is the entire budget available for acquiring the order and contributing to fixed costs. Every acquisition decision lives inside it.
Convert it to an acquisition ceiling
If you spend the full €39 acquiring the customer, you break even on the first order and cover none of your overhead. If you spend nothing, you acquire nobody.
The question is what proportion of contribution margin you are willing to reinvest, and that depends entirely on whether the customer returns.
If they never buy again, you need enough left over to cover fixed costs and profit. Reinvesting 50% of contribution margin gives you a €19.50 acquisition ceiling, which corresponds to a ROAS target of about 4.1×.
If they buy three times over two years at similar margin, the lifetime contribution is roughly €117. Now spending €39 to acquire them, the whole first-order margin, still leaves €78. Your ceiling rises to €39, which is a first-order ROAS target of about 2.05×.
Same product, same business. The defensible target moved by half, purely because of what happens after the first order.
Why this is where brands lose
Here is the uncomfortable part: your competitor does not need better ads to beat you. They need a better answer to this question.
If they know their repeat rate and you do not, they can bid €39 where you cap at €19.50. They will win every auction that matters, acquire the customers, and compound the advantage as their cohort data improves.
You will conclude that acquisition has become too expensive in your category. It has not. You are just bidding with less information.
This is the single most common reason we see capable accounts stall, and it is almost never diagnosed as a measurement problem because everything in the ad account looks fine.
Doing it properly
Calculate contribution margin by category, not blended. Category-level variance is enormous. In apparel, returns alone can invert the ranking. We have repeatedly found bestsellers that were margin-negative once returns were fully costed, which changes the media plan entirely.
Use cohort repeat rates, not averages. Blended repeat rate mixes your best and worst acquisition sources. Track by cohort so you know what customers acquired through paid media are actually worth, which is usually lower than the blended figure suggests.
Pick a payback window and hold to it. Twelve months is a reasonable default. Anything longer requires cash you may not have. Anything shorter means you are leaving room on the table.
Recalculate quarterly. Cost of goods moves. Shipping moves. Return rates move seasonally. A ceiling set in January is wrong by June.
The uncomfortable outcome
Sometimes the arithmetic tells you the opposite of what you hoped. A category you love has a contribution margin that cannot support paid acquisition at current prices. The honest conclusions are to raise the price, reduce the cost, improve the repeat rate, or stop advertising it.
What you should not do is keep advertising it and hope volume fixes the problem. It does not, and it never has.
Where to start
Take your top ten products by revenue. Calculate true contribution margin for each, including returns. Then compare that ranking to the one your ad spend currently follows.
In our experience the two lists rarely match, and the gap between them is the fastest available improvement in most accounts.
