Margin vs markup: use the right ROAS cost basis

Compare the denominators

Illustrative inputs: a product costs $60 and sells for $100. The difference is $40. Product margin is $40 ÷ $100 = 40%, while markup is $40 ÷ $60 ≈ 66.67%. Both describe the same price and cost; they answer different questions.

Why the mistake matters to ROAS

If product cost were the only non-ad cost, break-even ROAS would be $100 ÷ $40 = 2.5×. Using the markup fraction instead gives 1 ÷ 0.6667 ≈ 1.5×, an incorrect floor. A sale producing $100 at 1.5× ROAS would incur about $66.67 in advertising, exceeding the $40 available before ads.

Move from product margin to contribution

In practice, include all relevant variable costs. Suppose the same illustrative order incurs $10 more for fulfillment and payment fees. Contribution before ads becomes $100 − $60 − $10 = $30. Its contribution margin is $30 ÷ $100 = 30%, and the corresponding break-even ratio is $100 ÷ $30 ≈ 3.33×. The product margin alone would understate this requirement.

Convert when you only know markup

If price equals cost multiplied by one plus markup, the matching product margin fraction is markup ÷ (1 + markup). With a markup fraction of 0.5, margin is 0.5 ÷ 1.5 ≈ 0.3333, or 33.33%. This is an algebraic conversion for the same cost basis; it does not account for additional costs missing from the original markup.

Audit the spreadsheet label

Check the cell formula rather than trusting a column headed “margin.” Confirm whether it divides by revenue or cost, whether tax is included, and whether discounts change the selling price. Before feeding the percentage into a ROAS target, reconcile it with a real order’s revenue and expense lines. If cost or revenue is zero, handle the corresponding undefined ratio explicitly.

Examples are illustrative, not client results or benchmarks. The calculations use the inputs shown; real-world decisions depend on your records and assumptions. Report a correction.