ROAS, ROI, CPC, CAC…
What’s an e-commerce store owner supposed to make of all these acronyms?!
If you’re marketing your online store (and chances are that you have been), you’ve probably come across some or even all of these terms. But one of the most important of all is ROAS. Find out everything you need to know about this all-important ecommerce metric and see how it can help you become more profitable in your business.
What is ROAS and why it matters?
According to the ROAS definition, ROAS stands for Return on Advertising Spend and is a crucial marketing metric that assesses the revenue earned for every advertising dollar spent by your business.
Essentially, it’s the advertising equivalent of ROI (Return on Investment).ROAS is an important metric as it helps e-commerce store owners understand which marketing ad platforms and even campaigns are performing best so they can invest in those with the optimal results, in order to maximize their profitability. Click To Tweet
How to calculate ROAS
If you’re wondering how to calculate ROAS, the Return on Ad Spend formula is this:
ROAS = Revenue from Advertising / Ad Spend x 100
As a ROAS formula example, if you earned $30,000 in revenue from your ad campaigns for a particular month, and you spent $15,000 in advertising costs during that same month, your ROAS for that period would be:
ROAS = $30,000 / $15,000 x 100 = 200%
Now that you know how to calculate ROAS as a percentage, you can also calculate it in the form of a ratio, dollar amount or even a multiple. For example, a ROAS of 200% would translate to 2:1, 2 or 2x.
Luckily you don’t need to be a mathematician or statistician to keep on top of your ROAS calculations if you use the BeProfit ROAS calculator, which collects all your marketing data, analyzes and presents it in easily understandable graphs and reports.
Break even ROAS
Break even ROAS is the return on ad spend that you need to achieve in order to cover your advertising expenditure, or to break even. Once you exceed this break-even point, you will be able to earn profit from your campaigns. If you want to know how to calculate break even ROAS, the ROAS formula for break even ROAS is as follows:
Break Even ROAS = (𝟭 / % 𝗽𝗿𝗼𝗳𝗶𝘁 𝗺𝗮𝗿𝗴𝗶𝗻)
Target ROAS is the target return on advertising spend that you want to achieve for your overall marketing strategy or on a per-campaign basis.
If you use Google Ads in your business, you can set a Target ROAS bidding strategy whereby you bid based on your target ROAS, resulting in improved conversions or re\vwnue.
The average ROAS ecommerce businesses achieve is a lot higher than that of regular businesses. The ROAS ratio for e-commerce is 4:1, meaning that online stores can earn $4 in revenue for every $1 spent on advertising. ROAS is also specific to the ad platform that you use.
What is a good ROAS for ecommerce?
A good ROAS is a very subjective thing as it really depends on the e commerce business itself. While the average ROAS ecommerce is 4:1, whether or not that’s a good ROAS for your e commerce business can depend on these factors:
- Whether you’re a startup or a more established ecommerce store. Startups will probably need a higher ROAS to cover their cash shortfalls, while more established businesses would have cash available to invest in advertising costs, and can grow with a lower ROAS.
- The financial health of your business.
- Your net profit margins. If your business earns high profit margins you will be able to absorb lower ROAS.
You can only set your ROAS goal once you have an understanding of your profit margin, so you can assess how much leeway you have to spend on advertising, and how much ROAS you require to be profitable.
What is the difference between ROI and ROAS?
ROI stands for Return on Investment, and includes the return on the total investment in your business, including all expenses. On the other hand, ROAS, Return on Ad Spend, includes exactly that – the return on the amount of money that you spend on advertising alone, excluding all other business expenses. This helps you assess the effectiveness of your ad campaigns and ad platforms.
Tips to Improve your Return on Ad Spend
Before we dive into how to improve your Return on Ad Spend, you need to know all the costs involved in ad spend. It’s not just the ad platform fees that makes up ad spend – there are many other costs including:
- Ad creation costs – this includes salaries or payments to in-house or outsourced designers, content writers, and other advertising creators.
- Ad distribution costs – the salary/fees of a PPC manager or marketing person needs to be taken into account.
- Affiliate commission – if you work with affiliates for ad placement, you will need to pay a percentage commission to affiliates and other transactional fees.
- Advertising metrics need to be factored in, such as average cost per click, average cost per thousand impressions, total number of impressions and clicks.
If you use a profit tracker app such as BeProfit, the numbers will all get crunched for you, so you can track your ROAS, drill down into each ad campaign and platform using UTM attribution, and use this information to make data-driven, strategic decisions to improve your ROAS.
Like with any return on investment, there are a number of strategies you can use to improve ROAS. Your return on your ad spend is essentially the number of consumers in your target audience that you advertise to that actually convert into paying customers, So if you take steps to improve your conversion rate, you can in turn improve your ROAS.
Tip 1: Make sure you’re investing in the right ad platforms
Let’s say you sell baking utensils and the primary decision-makers for your product are married women. Since 42% of US women use Pinterest, this is one of the best platforms you could be advertising on. Unfortunately, you’re only running Facebook Ads. While Facebook, when targeted correctly, can result in a good ROAS Facebook, you’re missing out on a very relevant, high-intent audience on Pinterest. By switching some of your advertising spend to Pinterest, you could see a big increase in your total ROAS.
BeProfit can help you identify which ad platforms are performing best for you, so you can assess where to focus your ad budget for the optimal ROAS.
Tip 2: Understand your target audience
The first step in optimizing your conversion rate is to make sure that you’re advertising to the right audience. It can’t help your ROAS if your store sells ski gear but you’re advertising to consumers in Fiji. Once you select the correct audience you can customize and target your ad messaging and imagery to suit that audience.
Tip 3: Improve your ad Quality Score
Pay-per-click ads through Google Ads are ranked based on the relevancy and quality of your ads and keywords. This is known as your Quality Score and is used to calculate your cost per click and, when multiplied by your maximum bid, determines your ad position in the ad auction process.
The higher your Quality Score, the lower your CPC, which in turn leads to a better ROAS.
You can improve your Quality Score by:
- Creating relevant ad content
- Ensuring that your landing page is relevant to your ad
- Using relevant keywords
- Your click-through rate (CTR)
Tip 4: Optimize your ad’s landing page
If you want to improve your ROAS, you need to make your user experience as seamless as possible. Make sure that the page that the consumer lands on after clicking on your ad relates to the ad campaign. If shoppers get exactly what they’re expecting, they’re more likely to buy. Another good strategy to employ is ad retargeting by customizing ads and landing pages based on where the customer left off in your store’s funnel. It’s worth A/B testing your ad campaigns to see what works best and gets the most conversions.
Tip 5: Reduce cart abandonment rate
As of March 2020, almost 90% of global online shopping orders were abandoned in the cart.
Tactics to reduce cart abandonment rate include:
- Simplifying the checkout process
- Setting up a cart abandonment email flow
- Implement incentives in exit popups
Tip 6: Increase Average Order Value (AOV)
If you can get customers to buy more products in one order, which is increasing your AOV, you’re ultimately improving your ROAS as you’re earning more revenue off the same ad cost.
Some of the ways in which you can improve your AOV include cross-selling, upselling, bundling and offering free shipping for orders above a certain value.
ROAS is one of the most important KPIs for your online store and has a significant impact on your profitability. If you don’t monitor this crucial metric, learn how to calculate ROAS (or just use a profit calculator), and take decisive action to improve it, you could be losing out on profits.