Break-even calculator for online advertising

This calculator will help you determine how much you should be spending on online advertising. It is designed for those that want to be cash-flow positive on the first sale. Detailed instructions and term definitions are below.

Breakeven Analysis
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Inputs

For this calculator to work, you need four specific pieces of data about your business:

  • Conversion rate: the percentage of website visitors that purchase. Please note that this will vary from keyword to keyword. To use this tool properly, you should know the conversion rate for each keyword for which you are bidding. (This data should be available in your advertising accounts.)
  • Average order size. You can probably use your site-wide average order size but if you have a wide variance in average order sizes based on the search keyword, use keyword-specific average order sizes.
  • Gross margin %. Be sure to express this as a percentage.
  • Other expenses %. Add up your other costs associated with filling orders not including advertising (manpower, shipping costs not passed on to the consumer, credit card processing, customer service, etc.). Be sure to express this as a percentage.

Results

Break-even CPC
This is the largest cost per click you can afford to pay for a keyword to break even on that keyword. The formula is as follows: (Average order size – (product cost + other expenses)) X conversion rate.

Break-even CPA
This is the largest customer acquisition cost you can afford to pay to break even. In many cases, you may choose a bidding strategy where you choose a target CPA rather than CPC. The formula is as follows: (Average order size – (product cost + other expenses)).

Break-even MER
MER stands for media efficiency ratio and is a representation of how many dollars of revenue you need for every dollar you spend on ads. For example, an MER of 2.5 means that you need $2.50 in revenue for every $1.00 you spend on ads. In Google Ads, this metric is called revenue/cost. In general, this is probably the most important metric to pay attention to in your advertising campaigns. The formula is as follows: 100 / (product cost % + other expenses %).