Advertising and profitability terms
Average order value (AOV)
Revenue divided by the number of orders. Use net revenue when discounts and refunds materially affect the business.
Break-even ROAS
The minimum revenue returned per advertising dollar before contribution after advertising reaches zero. It equals net revenue divided by pre-ad contribution margin.
Click-through rate (CTR)
Clicks divided by impressions, usually expressed as a percentage. CTR describes response to an ad but does not prove profitability.
Contribution margin
Net revenue remaining after variable costs. For advertising decisions, it is useful to calculate contribution both before and after ad spend.
Conversion rate (CVR)
Conversions divided by relevant visits or clicks. Always document the conversion event and denominator.
Cost per acquisition (CPA)
Advertising spend divided by acquisitions. Maximum CPA should be based on contribution margin and the desired profit retained per customer.
Cost per click (CPC)
Advertising spend divided by clicks. Break-even CPC can be estimated by multiplying maximum CPA by conversion rate.
Cost per mille (CPM)
The cost of one thousand impressions: spend divided by impressions, multiplied by 1,000. Use our CPM calculator to solve for CPM, budget or impressions.
Customer acquisition cost (CAC)
Total acquisition-related sales and marketing cost divided by new customers. CAC is broader than platform CPA when it includes staff, agencies, tools and creative production.
Customer lifetime value (LTV)
An estimate of contribution or revenue produced across a customer relationship. Contribution-based LTV is more useful for profitability than revenue-only LTV.
Gross margin
Revenue minus cost of goods sold, divided by revenue. It usually excludes fulfillment, payment and other variable expenses that contribution margin includes.
Marketing efficiency ratio (MER)
Total business revenue divided by total marketing spend. MER is a blended business view and does not depend on one platform's attribution model.
Profit on ad spend (POAS)
Contribution profit attributed to advertising divided by ad spend. POAS focuses on profit rather than top-line revenue.
Return on ad spend (ROAS)
Attributed revenue divided by advertising spend. A 3x ROAS means three dollars of revenue were attributed for every dollar spent; it does not mean three dollars of profit.
Return on investment (ROI)
Net gain divided by total investment. ROI normally includes more costs than ROAS and answers a broader financial question.
Target ROAS
The performance objective used for planning or bidding. A sustainable target is normally higher than break-even ROAS to retain profit and cover overhead.
Use the definitions
Calculate your threshold with the break-even ROAS calculator, then review ROAS versus CPA and MER versus ROAS.