How to Calculate ROAS for eCommerce
Marketing and advertising can be two costly components of running an eCommerce business. However, utilizing the right strategy and spending wisely can increase customers and sales. Therefore, they are critical for revenue generation.
Many businesses, not just online businesses, fail to understand and optimize their marketing and advertising budgets. As a result, customer acquisition campaigns can be costly. Last year, over $285 billion was spent on advertising in the US alone. It’s clear that the advertising industry is benefitting from the growing eCommerce industry.
ROAS, or Return on Advertising Spend, is a metric used to measure just how effective your advertising efforts are. The metric compares your revenue to your spend on advertising. Ideally, you want to be making considerably more revenue than you’re spending on ads. The simplest calculation for ROAS is revenue from advertising divided by the cost of the advertising.
ROAS is a key metric for understanding the efficacy of a digital advertising campaign and the opportunities to improve.
How to Calculate ROAS
You may already be using some of the more common metrics to guide your marketing and advertising efforts. For example, CAC (customer acquisition cost) looks at how much you’re spending on acquiring each new customer. Whereas CAC looks at all the costs associated with customer acquisition, ROAS looks specifically at the amount of revenue generated for every dollar spent on a campaign
ROAS is a key metric to optimize your marketing and customer acquisition. Advertising spend contributes to your CAC and helps you see the big picture of your Customer Acquisition Cost and how that relates to your customer lifetime value (CLV). Raise your ROAS, lower your cost per customer.
ROAS is relatively simple to calculate with the below formula:
ROAS = Revenue/Ad Spend
For example, if you achieved $100,000 in revenue, but spent $50,000 on ads, that makes for a ROAS of 200% or 2:1. You’re doubling every dollar you spend on advertising.
Your marketing goals, and your market, will dictate what constitutes a good ROAS. However, a good rule of thumb is to aim for a ROAS goal of 400% or 4:1.
As mentioned, your figure will vary depending on your goals. Start-ups may require more funds, so aim for a much higher target. Alternatively, if you’re looking to introduce a new product, you may be looking to increase conversions rather than revenue.
It’s important to calculate ROAS for your e-commerce business, so you can continue to optimize and learn instead of spending inefficiently or indiscriminately on advertising.
ROAS vs ROI
You might be thinking, I already track my advertising ROI (return on investment). Why would I need to track both? The answer is simpler than you think.
ROI is meant to measure the big picture. Your advertising ROI tells you how your advertising efforts are impacting the business, as a whole. This metric is equally as important as ROAS. However, it takes into account the cost of goods, cost of logistics and shipping, and any other business costs.
ROAS is specific to advertising spend and only covers your spend on advertising, and how much revenue that advertising generated. While your ROAS might be high, that doesn’t mean your ROI is high.
Understanding and monitoring both ROAS and ROI will help you to optimize your advertising campaigns.
The Importance of ROAS
When not approached strategically, advertising can burn through cash. Social media ads, for example, continue to increase in cost, as the competition builds. As this trend continues, it gets more difficult to achieve results.
At this point, many eCommerce companies approach an ad agency. After all, they are specialists in the business. However, it’s worth bearing in mind that even agencies can get caught in the ad spend trap. This is especially the case with social media ad platforms. Without proper monitoring, spending can get out of control.
Proper use of ROAS helps you to monitor and optimize your ad strategies. This should help to keep your PPC agency, or your marketing team, on track.
ROAS helps you maintain a positive focus on your advertising strategies, while understanding the end result. Often, many marketers will focus on CPC (average cost per click/conversion). While this can be a useful tool to understand how your ads are resonating with buyers, it doesn’t necessarily advise on the success of your campaign. Ultimately, your primary goal is to make sales. A conversion is good but, in DTC, a purchase is a real success.
Return on Advertising Spend is key for the optimization of your ad campaigns. The metric is critical to the test and learn approach. Use ROAS to scale the ads that are working well, and stop spending as much money on those that don’t. As a result, you’ll be spending money on campaigns that actually generate sales.
How to Track ROAS
These days, most advertising platforms have some form of metric tracker built-in. For PPC ads, ensure that Google Analytics is set up on your website, and connected to your Google Ads. The platform includes a ROAS metric automatically.
Similarly, Facebook’s ad platform provides a metrics tool. This is called the Meta Pixel. The pixel tracks data from Facebook Ads onto your website. However, the pixel needs access to purchase data to fully understand your ROAS.
Typically, you will need access to a tracker like the Meta Pixel or Google Analytics for the most accurate representation of your ROAS. Without these, there’s no way to attribute specific sales to specific ads.
How to Improve ROAS
Overall, to improve ROAS, you need to improve your ads. Admittedly, that’s not as simple as it sounds, but it’s a good place to start.
Begin by focusing on your copy and your content. Your ads need to offer something and engage your audience. In the DTC space, competition is fierce. Not only are you competing with your market competitors, but you’re also competing with other online content. Your customers are logging on to be entertained, so you need to do just that.
Similarly, your message and branding need to be clear to build visibility and recognition among consumers.
Each of these elements can be optimized with the test and learn approach. Begin by creating small campaigns to test ads and use metrics to optimize and scale the ones that perform the best. This ensures that you put the Lion’s share of your budget into the right ads.
Finally, ensure that your ads are optimized for mobile to avoid any lost sales. Around 73% of consumers use a combination of mobile shopping and desktop shopping. It might seem like stating the obvious, but your eCommerce business, and your ads, need to work on mobile.
At Yardline, we think eCommerce advertising metrics are critical to a successful campaign. We want to work with you to understand your business metrics, and invest for the best possible result. Get in touch with us to discuss real eCommerce business growth.