Working with ecommerce brands on Google Ads, I often see this: ROAS looks great, but the business is still unprofitable on every sale. Today, I'll show you exactly why your 4x ROAS might be costing you money, and what you should be measuring instead to ensure your marketing actually drives profit.

What's Wrong With ROAS as Your Primary Metric?

ROAS only tells half the story. A 4x ROAS means you spent $1 and generated $4 in revenue. But revenue isn't profit.

Here's a real example that illustrates the problem. Say you're selling two gym products:

• Knee sleeves for $40
• Gym belts for $90

Both campaigns are hitting 4x ROAS. You think they're equally successful. But when you look at actual profit, the picture is completely different.

Same ROAS. Completely different profit impact. This is why some businesses celebrate ROAS wins while going broke.

What Are the Three Margins That Actually Matter?

Every profitable business owner thinks in three types of margins.

1. Gross Margin

This is your starting point. Using the gym belt as an example:

Formula: (Revenue - Cost of Goods Sold) ÷ Revenue

Gym Belt Calculation:

• Revenue: $90
• Cost of goods sold: $35
• Gross Margin = ($90 - $35) ÷ $90 = $55 ÷ $90 = 61%

This tells you the product has potential, but it's not the full picture.

2. Contribution Margin

This is the money left after all variable costs—the cash available for marketing and overhead. This is the number that should drive your marketing decisions.

Formula: Revenue - All Variable Costs

Knee Sleeves:

• Revenue: $40
• Variable costs: $28 (COGS $20 + shipping $5 + fees $3)
• Contribution margin: $12 (30%)

Gym Belt:

• Revenue: $90
• Variable costs: $48 (COGS $35 + shipping $8 + fees $5)
• Contribution margin: $42 (47%)

3. Net Margin

This is what's left after ALL expenses—including salaries, rent, software, everything.

Formula: (Revenue - All Costs) ÷ Revenue

Gym Belt Complete Breakdown:

• Revenue: $90
• Variable costs: $48
• Fixed costs: $32 (allocated portion of rent, salaries, software, etc.)
• Total costs: $80
• Net profit: $10
• Net Margin = 11%

As a business owner, this final number determines if your business survives and grows. It's the real impact of your marketing.

How Do Contribution Margins Change Your Campaign Strategy?

Those contribution margins completely change how you should run your campaigns.

Here's where it gets interesting. Those contribution margins completely change how you should run your campaigns.

For the knee sleeves with only $12 contribution margin:

• Revenue: $40, Variable costs: $28, Contribution: $12
• If your fixed costs are $2-4 per unit, your maximum CPA should be $8-10
• ROAS calculation: Need minimum 4x ROAS ($10 ad spend to generate $40 revenue)
• Your strategy should focus on volume and efficiency

For the gym belt with $42 contribution margin:

• Revenue: $90, Variable costs: $48, Contribution: $42
• If your fixed costs are $7-12 per unit, you can afford a CPA up to $30-35
• ROAS calculation: Only need 2.6x ROAS ($35 ad spend to generate $90 revenue)
• You can invest in premium targeting and expensive keywords

Same ROAS target for both products would be a massive mistake. You'd be leaving money on the table with the gym belt, or burning cash on the knee sleeves.

This is why smart business owners don't get excited by ROAS alone. They want to see profit-driven marketing decisions, not revenue vanity metrics.

How Should You Report Marketing Performance?

Whether you're reporting to a business owner or you ARE the business owner, here's how profit-focused thinking sounds:

Instead of: "We achieved 4x ROAS!"

‍Say: "This campaign generated profitable sales with positive contribution margin."

Instead of: "Our CPA increased by 20%!"

‍Say: "Our cost per acquisition is still 40% below our maximum profitable CPA based on contribution margin."

Example of profit-focused reporting:

"Our gym belt campaign generated $42 in contribution margin per sale (revenue $90 minus variable costs $48) with a $25 CPA, delivering 68% margin efficiency ($42 - $25 = $17 profit per sale)."

"We reallocated budget from knee sleeves to gym belts, increasing overall campaign contribution margin by 35%."

This is the language of sustainable, profitable marketing.

How to Implement Margin-Based Campaign Management

Here's how to implement this immediately:

Step 1: Audit your product portfolio Calculate contribution margins for your top 10 products. You'll be shocked at the differences.

Step 2: Restructure your campaigns Separate high-margin from low-margin products. They need completely different strategies.

Step 3: Reset your KPIs Start tracking contribution margin per campaign, not just ROAS. Your media buyers should be optimizing for profit, not revenue.

Step 4: Educate your team Train everyone on margin-based optimization. It's a completely different mindset.

The result: You'll make smarter budget decisions, ensure every marketing dollar drives actual profit, and build a truly sustainable business.

How Do Shopify Stores Calculate These Margins?

Calculating these margins manually is time-consuming and error-prone. For Shopify stores, the LiveTimely app automates all these calculations, gives you real-time margin data, and integrates directly with your store analytics.

Frequently Asked Questions

Q: Why is a high ROAS not always good?A: ROAS measures revenue generated per dollar spent, but revenue isn't profit. A product with 4x ROAS but low margins might be unprofitable after accounting for COGS, shipping, fees, and fixed costs. Two products with identical ROAS can have completely different profit impacts.

Q: What's the difference between gross margin and contribution margin?A: Gross margin only subtracts cost of goods sold from revenue. Contribution margin subtracts ALL variable costs—including shipping, payment processing fees, and any per-unit costs. Contribution margin gives you the actual cash available for marketing and overhead.

Q: How do I calculate my maximum profitable CPA?A: Take your contribution margin per sale, subtract your allocated fixed costs per unit, and what remains is your maximum CPA. For example, if your contribution margin is $42 and fixed costs are $10 per unit, your maximum CPA is $32.

Q: Should I stop advertising low-margin products?A: Not necessarily. Low-margin products may still be profitable with efficient, volume-focused strategies. The key is setting appropriate ROAS targets based on their actual margins rather than applying the same target across all products.

Key Takeaways

Revenue impresses marketers. Margins build sustainable businesses. Master both, and you'll never waste another marketing dollar.

Your next steps:

1. Calculate contribution margins for your top products today
2. Realign your ad spend based on profit potential, not just revenue
3. Start making decisions based on actual profitability