Break-even, margin and ROAS explained: the numbers behind a small business

Updated: 29 October 2026

Most pricing and advertising decisions in a small business come down to a few divisions. The hard part is dividing the right numbers: a margin that leaves out the shipping, a price that still includes VAT or a ROAS compared with the wrong line can make a losing product look profitable. This guide follows one example shop through all of them. It sells one product at 40 before VAT, and every figure below is worked out from that.

Three margins for one product

Each sale costs the shop 16 for the product, 5 for shipping and 1 in payment fees. Margin is profit divided by the selling price; markup is the same profit divided by the cost. Which costs you take off decides which margin you get, and the one that drives every calculation below is the contribution margin: the price minus all the costs that come with each sale. Management accounting textbooks define it as the amount by which the selling price exceeds the total variable cost per unit.

Measure	Calculation	Result
Gross margin (product cost only)	(40 − 16) ÷ 40	60%
Markup on the product cost	(40 − 16) ÷ 16	150%
Contribution per sale	40 − 16 − 5 − 1	18
Contribution margin ratio	18 ÷ 40	45%

The 60% looks reassuring, but only 18 of every 40 is left to pay the rent, the software and the owner. Use prices and costs without VAT throughout: VAT collected is passed on to the tax authority and is not income.

Margin and markup calculator

Break-even: how many sales pay the fixed costs

Fixed costs are the ones that stay the same however much you sell. Say they are 2,700 a month. Every sale contributes 18 towards them, so the break-even point is 2,700 ÷ 18 = 150 sales, or 2,700 ÷ 0.45 = 6,000 of revenue. Below that the month ends in a loss; each sale above it adds 18 of profit. A profit target works the same way: to make 1,800 a month the shop needs (2,700 + 1,800) ÷ 18 = 250 sales. When the division does not come out even, round up, because a fraction of a sale does not exist.

The margin of safety measures how far sales can fall before the profit is gone: (expected sales − break-even sales) ÷ expected sales. With 200 sales expected, that is (8,000 − 6,000) ÷ 8,000 = 25%.

2,700 ÷ 18150 sales to break even.
(2,700 + 1,800) ÷ 18250 sales for a profit of 1,800.
2,700 ÷ (48 − 22)104 sales: the wrong answer you get by using the price with 20% VAT (48) instead of 40.

Break-even calculator

Advertising: ROAS and the line it has to clear

ROAS, return on ad spend, is the revenue an advertising campaign brings in divided by what it cost. Google Ads sets its Target ROAS as a percentage: 5 in sales for each 1 spent is a target of 500%. Revenue is not profit, so the question is which ROAS pays for the ads. Out of each sale the shop keeps 45% before advertising, so the ads pay for themselves when revenue × 0.45 equals the ad spend: the break-even ROAS is 1 ÷ 0.45 = 2.22. The most the shop can pay for one order, its maximum cost per acquisition (CPA), is the order value × 0.45 = 18.

A campaign that spends 1,000 and brings 100 orders worth 4,000 has a ROAS of 4 (400%), well above 2.22. It leaves 4,000 × 0.45 − 1,000 = 800 towards the fixed costs, and each order cost 10 against a maximum of 18.

Contribution margin	Break-even ROAS	As a Target ROAS
20%	5	500%
25%	4	400%
30%	3.33	333%
40%	2.5	250%
45%	2.22	222%
50%	2	200%
60%	1.67	167%

Use the contribution margin, not the gross margin: with the 60% gross margin the break-even ROAS would look like 1.67, and campaigns between 1.67 and 2.22 would seem to pay while losing money on every order. Also check what the revenue figure counts: each ad platform credits sales by its own attribution rules, and returns or cancelled orders may still be in it.

ROAS calculator

Fixed costs and advertising together

The break-even ROAS only covers the ads. If every order came from advertising at a CPA of 10, each sale would contribute 18 − 10 = 8 instead of 18, and the shop would need 2,700 ÷ 8 = 337.5, so 338 orders a month to break even instead of 150. Advertising that pays for itself can still leave the business short; this is the number to compare with what the market can absorb.

What an hour of the owner's time earns

At 250 sales without advertising the shop makes 1,800 a month, 21,600 a year, before income tax. If the owner works 35 hours a week for 47 weeks, that is 21,600 ÷ (35 × 47) = 21,600 ÷ 1,645 = 13.13 an hour. That figure is useful twice: to compare the business with a job, and to price the owner's own time. A task that takes 5 hours a month costs 65.65 of that time, so paying someone less than that to do it leaves the owner better off, provided the hours go to work that earns.

For an employee the same idea gives the real hourly wage: take-home pay minus the costs of going to work, divided by every hour given to it, commuting and unpaid hours included. For a freelancer, it works backwards: the income needed, plus business costs and tax, divided by the hours a client actually pays for.

Real hourly wage calculator

Mistakes that make a product look profitable

Prices with VAT: 48 instead of 40 cut the break-even point from 150 sales to 104 in the example above.
Margin and markup mixed up: a 150% markup is a 60% margin, and a 60% markup would be only a 37.5% margin.
The gross margin in the ROAS line: it leaves out shipping and fees, which the ads have to cover too.
Fixed costs for one period and sales for another, such as yearly rent against monthly sales.
Break-even units rounded down: 2,700 ÷ 17 = 158.8, so 158 sales still leave a loss and 159 is the break-even point.
Revenue from ad platforms taken at face value, with returns, cancelled orders and sales claimed by two platforms still counted.

Frequently asked questions

Is ROAS the same as ROI?

No. ROAS divides revenue by ad spend; ROI divides the profit by what was spent. The campaign above has a ROAS of 4 but an ROI of 800 ÷ 1,000 = 80%.

Which margin do I use for the break-even ROAS?

The contribution margin before advertising: the price minus every cost that comes with a sale, such as the product, shipping and payment fees.

What is the difference between fixed and variable costs?

Variable costs come with each sale: materials, packaging, shipping, payment fees, commissions. Fixed costs are paid whatever you sell, such as rent, software and insurance.

Why round the break-even point up?

Because only whole sales exist. If the result is 158.8, 158 sales are not enough; the 159th is the first that covers the costs.

Should the owner's pay be a fixed cost?

If you want the break-even point to include a wage, yes: add it to the fixed costs. Otherwise the profit is what pays the owner, as in the hourly example above.