If you want real, long-term growth for your e-commerce brand, you must move beyond focusing solely on ROAS (Return on Ad Spend). While ROAS is a popular and simple metric that many advertisers use, it does not always tell the full story about your business’s health or potential for scaling.
This blog, inspired by a brilliant training video by the Grow My Ads YouTube channel (watch the full session here), breaks down why it’s time to rethink your performance metrics. We’ll dive deep into two far more strategic indicators: NCAC (New Customer Acquisition Cost) and LTV (Customer Lifetime Value).
Why ROAS Became Popular (and Why It Fails at Scale)
ROAS is simply revenue divided by ad spend. If you spend $1,000 and generate $4,000 in revenue, your ROAS is 400%. That sounds great on paper. It gives you a quick and clear view of efficiency. But here’s where it falls short:
- ROAS doesn’t distinguish between new and returning customers.
- It doesn’t reflect true profitability.
- It discourages exploration of new audiences.
- It leads to optimization around short-term results rather than long-term growth.
Many advertisers get trapped chasing higher ROAS percentages, and in doing so, they shrink their audience pool, rely heavily on repeat buyers, and miss out on new customer acquisition opportunities.
The Break-Even ROAS: A Starting Point
Before moving beyond ROAS, you must first understand your break-even point. This is the minimum ROAS required to avoid losing money.
Formula:
Break-even ROAS = 100 / Profit Margin (%)
Example: If your margin is 25%, your break-even ROAS is 400%. Anything above 400% means you’re profitable; anything below means you’re losing money.
Knowing this helps you make informed decisions when testing lower ROAS levels to reach broader audiences.
The Real Bottleneck: Growth Ceilings Created by ROAS Targets
When you optimize your campaigns to only achieve high ROAS, you’re essentially telling the algorithm to only target high-intent audiences. This limits your reach. Over time, your campaigns plateau:
- You’re unable to spend more, even if you increase your daily budget.
- You start seeing competitors outbid you for impression share.
- Growth stagnates.
This isn’t due to poor campaign setup but because your targets are too restrictive. ROAS becomes a self-imposed limit.
Profit Peak: What You Should Really Aim For
As you increase ad spend, ROAS usually decreases. But that’s not necessarily a bad thing.
Why?
Because your total profit and number of new customers might actually increase.
The key is to track backend business performance: profit, customer acquisition, and retention. Plot your ad spend against total profit, and you’ll find a sweet spot – your profit peak. This is the point where you achieve the highest profit and customer growth, even if ROAS is lower.
What is NCAC (New Customer Acquisition Cost)?
NCAC tells you how much you’re spending to acquire a new customer. This is different from CPA (Cost Per
Acquisition), which may include both new and returning customers.
Understanding NCAC is crucial for:
- Evaluating marketing efficiency.
- Measuring campaign success based on actual customer growth.
- Making better budgeting and creative decisions.
What is LTV (Customer Lifetime Value)?
LTV is the total revenue you expect to earn from a customer over the entire time they remain your customer.
Why is this important?
Because if you know your LTV, you can:
- Justify higher NCAC.
- Allocate budgets more aggressively.
- Understand your real return on advertising investment.
NCAC-to-LTV Ratio: The Most Important Metric for Scaling
The real magic happens when you combine NCAC and LTV. This ratio tells you how sustainable and scalable your customer acquisition is.
Benchmark: A healthy NCAC-to-LTV ratio is around 1:3. For every $1 you spend to acquire a new customer, you expect to make $3 over their lifetime.
If your ratio is 1:2, you may need to reduce acquisition costs or increase customer retention. If you’re at 1:5 or higher, you may be under-investing in acquisition and missing out on growth.
How to Implement This in Your Business
- Know your margins: Understand your COGS and calculate break-even ROAS.
- Track NCAC and LTV: Use tools like Shopify, Google Analytics, or CRM data.
- Start testing: Slowly lower ROAS targets by 10-15% and track results.
- Measure backend results: Look at profit, NCAC, LTV, and customer counts.
- Scale: Allocate more budget to campaigns that generate the best NCAC-to-LTV returns.
Strategic Advantages
- Long-term profitability over short-term vanity metrics.
- Better forecasting and planning.
- Smarter creative and audience targeting based on real data.
- Stronger competitive positioning by operating profitably at lower ROAS.
Final Thoughts
ROAS is a starting point, not a strategy. If you want to scale your e-commerce brand profitably, you need to track and act on metrics that reflect real business growth.
Start with NCAC and LTV. Build a testing framework. Track backend performance. Break free from the ROAS trap and scale with confidence.
