Written for online shops in the UK selling on their own site or on marketplaces: direct-to-consumer brands, private-label and FBA sellers, dropshippers and subscription sellers.
The short version
- Strip the VAT out of the price.Work margin on the price without VAT. The customer pays the VAT, but you pay it over, so it was never yours.
- Take off each order's costs, before ads.Product cost with freight and duty, packing, delivery even when free, card and marketplace fees, and a returns set-aside. The rest is margin.
- Find your break-even ROAS from that margin.ROAS is sales per pound of ads. Break-even is 1 divided by your margin, or 1.2 divided by it if the dashboard includes VAT.
Most online shops know their revenue, their ROAS and their bank balance. Fewer know what a single order leaves behind once the product, the packing, the free delivery, the card fee and the returns have come out. That number is your contribution margin per order. It decides how much you can pay to win a customer, and it is how you test whether your ads are working.
Build the margin on the right basis
Work on the price without VAT. The price a consumer sees must include VAT, but the VAT is not yours, so measure margins on VAT-exclusive revenue. Then take off, for each order:
- Landed product cost: what you paid the supplier plus freight in and customs duty. Import VAT you can recover is not part of it.
- Picking, packing and packaging, whether you do it or a 3PL does.
- Outbound delivery, including the delivery you give away free.
- Card fees and marketplace fees, including FBA fulfilment fees by size tier, monthly storage, and aged-inventory and peak-season storage charges. Take marketplace fees from the platform's own fee page and date them: Amazon's referral fee, for example, is a category percentage of the VAT-inclusive price including delivery, with a per-item minimum.
- A returns provision: your returns rate times what you lose on each return.
You cannot pass the card fee on to the customer: surcharges on consumer card payments are banned (Consumer Rights (Payment Surcharges) Regulations 2012).
What is left is contribution margin. Take off your cost to acquire a customer (CAC) and you have the margin after marketing.
| Net price (£48.00 including VAT, divided by 1.2) | £40 |
| Landed product cost | -£12 |
| Picking, packing and packaging | -£2.10 |
| Delivery, offered free to the customer | -£3.40 |
| Card fee: 1.5% + £0.20 on £48.00 | -£0.92 |
| Returns provision: 12% x £6.50 lost per return | -£0.78 |
| Contribution margin per order (52.0% of net revenue) | £20.80 |
| Margin after a £14.00 CAC | £6.80 |
£20.80 less £14.00Indicative figures. Put in your own card rate, delivery cost and returns rate.
The ROAS you need just to break even
Break-even ROAS is 1 divided by your contribution margin percentage, on the revenue basis your ad platform reports. Most dashboards report VAT-inclusive order values, and then break-even is 1.2 divided by the margin percentage. On the worked order above that is 1.92 on net revenue but 2.31 on a VAT-inclusive dashboard.
A ROAS measured on VAT-inclusive revenue counts VAT you pay over as if it were sales you keep, so a campaign can look healthy and still lose money.
| Contribution on £17,500 of net sales at 52% | £9,100 |
| Ad spend | -£10,000 |
| Profit or loss on the campaign | -£900 |
£21,000 of VAT-inclusive sales (2.1 x £10,000) is £17,500 before VAT.
Lifetime value and payback
LTV is contribution per order times the orders a customer places in a stated 12 months, undiscounted. Payback is CAC divided by contribution per order. In the worked example, at 1.6 orders in 12 months LTV is £33.28, LTV to CAC is 2.38 and payback is 0.67 orders, so the first order covers the cost of winning the customer.
Asked in Greymill
Sales Meta reports: 2.1 x £10,000 = £21,000 with VAT
Without VAT: £21,000 / 1.2 = £17,500
You keep 52% of that: £9,100
Less ad spend: £10,000
Result: a £900 loss
Your break-even ROAS is about 2.31 (1.2 / 0.52), because Meta counts VAT. On sales without VAT it would be about 1.92 (1 / 0.52). Your 2.1 falls short.
Why it looked fine: a ROAS on sales with VAT in counts the VAT you pay over as if you kept it. So a campaign can look healthy and still lose money.
Send me your best sellers and I will work out break-even ROAS for each.
Ask it about your own business
Paste this into Greymill with your own figures, and Cash & Profit works it through for your business.
I run an online shop in the UK. Work out the contribution margin per order and my break-even ROAS for my best-selling product: price [£ including VAT], landed cost [£], picking and packing [£], delivery [£], card and marketplace fees [rates], returns rate [%] and loss per return [£]. My ad platform reports revenue [with or without VAT] and my CAC is [£].
More for online retail and ecommerce in the UK
- Paying for stock and ads weeks before the platforms pay youBuild a 13-week cash flow on each platform's real payout timing, allow for reserves, holds and chargebacks, and price any revenue-based advance before you sign.Read the lesson
- VAT when you sell on marketplaces, ship from abroad or sell into the EUWho accounts for VAT on each kind of online sale, what is changing for parcels of £135 or less (As of Oct 2026), and how to test whether the Flat Rate Scheme suits a reseller.Read the lesson
- Making sure what you import, own-brand or dropship is legal to sellIf you import, own-brand or dropship, the law can treat you as the producer: what that means for safety duties, markings, category paperwork and packaging.Read the lesson
- What your returns policy can say, and what the law has already decidedOnline customers have a right to cancel and a separate right to reject faulty goods, so write terms that match both and refund disputes stop costing you.Read the lesson
- Staffing the Christmas peak with agency pickers, temps and freelancersBlack Friday to the January returns needs extra hands: the agency, pay, safety and freelancer rules that apply to an online shop's peak team.Read the lesson
- Getting reviews, creator posts and email sales without a fineReviews, influencers, sale prices and email now carry direct fines for online shops; here is how to use each one within the rules.Read the lesson
- Amazon has suspended my account and is holding my moneyHow to get a suspended marketplace account back with one complete appeal, the notice rights you have, and how to keep trading while your money is held.Read the lesson
Open the interactive lesson · Every online retail and ecommerce lesson · What Greymill knows about the trade
Sources
The primary sources behind this lesson, checked Oct 2026.
- Flat rate percentages (Unit economics and worked examples)
- Notice 733 section 9 (Unit economics and worked examples)
- Base fees table (Unit economics and worked examples)
- Retail sales, Great Britain: August 2026, online sales section; series J4MC (Unit economics and worked examples)
- Bank Rate history; MPC dates (Unit economics and worked examples)
- Consumer price inflation, UK: August 2026, main points (Unit economics and worked examples)
- When to register (Hard cases: tax, cash, marketplaces and exit)
- Art 4 (Hard cases: tax, cash, marketplaces and exit)
- regs 5 and 7 (Hard cases: tax, cash, marketplaces and exit)
- Arts 3(2), 4 and 11 (Marketplaces: fees, account health and suspensions)
- Account Health help pages (Marketplaces: fees, account health and suspensions)
- Scheme overview (Cash, funding and bookkeeping)
- FRS 102 s.13 (Cash, funding and bookkeeping)
- Visa Core Rules, dispute time limits (Payments, chargebacks, bnpl and fraud)
- reg 6A (Payments, chargebacks, bnpl and fraud)
- FCA deferred payment credit rules (Payments, chargebacks, bnpl and fraud)
- Treasury announcement, 15 July 2026 and key changes (Payments, chargebacks, bnpl and fraud)
- SAQ A payment page elements and all other eligibility criteria (Payments, chargebacks, bnpl and fraud)
- Limitation Act 1980 s.5 (Read the user and answer at their level)
- Prescription and Limitation (Scotland) Act 1973 s.6 (Read the user and answer at their level)
- Windsor Framework collection (Read the user and answer at their level)
- UK GDPR Art 33(1) (Read the user and answer at their level)