ROAS can look healthy while a discounted order loses money.
The reason is simple:
ROAS measures revenue against ad spend.
It does not automatically account for product cost, discounts, shipping subsidies and other variable costs.
Start with contribution
Suppose:
Selling price = ₹2,000
Product and variable fulfilment costs = ₹1,000
Discount = ₹200
Contribution before advertising = ₹800
If you spend ₹400 to acquire the order, the contribution after advertising is ₹400.
The revenue-to-ad-spend ratio is:
₹2,000 ÷ ₹400 = 5x ROAS
But the business is not making ₹1,600 of profit.
The economics are closer to contribution after variable costs.
A planning formula
A simplified break-even ROAS can be expressed as:
Break-even ROAS = revenue ÷ maximum allowable ad spend
The maximum allowable ad spend should be derived from the contribution available before advertising.
So if contribution before advertising is ₹800 on a ₹2,000 order:
₹2,000 ÷ ₹800 = 2.5x
This is a simplified example.
Your actual calculation should reflect the costs you choose to treat as variable.
Why discounts change the number
Without a discount:
Revenue = ₹2,000, Contribution = ₹800
With a ₹200 discount:
Revenue = ₹1,800, Contribution may fall to ₹600.
That means the maximum ad spend you can tolerate also falls.
A campaign can therefore move from profitable to unprofitable without ROAS changing dramatically.
Use it before a sale
If you plan a 15% promotion, model:
- normal contribution
- discounted contribution
- break-even ad spend
- break-even ROAS
Then decide whether the campaign is viable using our Discount Profitability Calculator.
Don't use ROAS alone
Track:
- ROAS
- CAC
- contribution per order
- discount cost
- new customer rate
- repeat purchase
- payback
A high ROAS campaign can still be unattractive if the product margin is weak.
The right question is:
“How much contribution can this order afford to spend on acquisition?”
That is the number your paid media target should be built around.