ROAS analysis: are you looking at the right numbers?
If you run an ecommerce company then you know that looking at your metrics from a few different angles is the only guaranteed way to make sure you’re on the right track.
Does your analysis include Return on Ad Spend (ROAS)?
This simple but very powerful tool complements the outlook provided by the Return on Investment (ROI) analysis and helps you check if paid ads are doing what they are supposed to do: make money.
What is ROAS?
It’s a metric that evaluates whether or not your online campaign is successful at generating revenue. It tells the advertiser and the business owner how much money Paid Ads is bringing in to the company in relation to the spend going out.
If you invest $100 into ads and you get a $300 in revenue, that means your ROAS is 300% or 3X.
Is this good or bad?
Well, it depends, but probably it’s not as great as it sounds. ROAS doesn’t take into consideration any expenses other than ad spend (that’s when ROI comes into the equation) but it’s a very important indicator of the effectiveness of your online marketing efforts.
How to calculate ROAS?
ROAS = Revenue derived from the ads / Cost of the ads
The formula works after you have calculated two factors: the total revenue and the total cost generated by the Paid Ads campaign.
What does it mean for your business?
With ROAS you can easily understand which of your online campaigns are generating revenue. It’s a very simple and efficient tool that tells you if you are on the right path.
Other indicators, like click-through rate or conversion rate might tell you if you’re getting enough attention to your business, but at the end of the day, the objective of your company is not to drive traffic – your aim is to make money. ROAS is a quick way to discover if Paid Ads are doing that.
How should you use it to judge the performance of your ads or advertisers?
When you compare the figures of different campaigns that are running at the same time, it’s quite common that your attention is centered on indicators like conversion rate, impressions, clicks, leads, and cost.
These numbers can give you an idea of the impact your Paid Ads are having on attracting potential clients to your business, they don’t tell you which of the ads are actually generating money profitably. When you add to the mix the revenue generated by each campaign and you cross it with the costs, the ROAS metric will tell you what are the most profitable strategies for your online business.
ROAS is not a tool to be used on its own. It should be combined with other types of analysis, starting with ROI. But it’s a key factor in understanding how your Paid Ads are performing. It helps you to get accurate data to support decisions about spend increase or campaign budgets.
With ROAS, it becomes easier to establish a benchmark average for your ads, making future calculations more precise. You get crucial information about the performance and quality of your Pais Ads campaigns.
What is a good ROAS?
As told before, a ROAS result of 300% can sound very promising at a first look, but it’s very typical that a figure like this is not good enough.
As a business owner, you must take into consideration all the costs you incur while getting your product to market. That’s the analysis done by the ROI (Return on Investment), which adds operational costs, fixed costs, and other expenses to the equation.
It all depends on the structure of cost for each company. If some business can profit from a ROAS of 120%, most of them need a much higher number to remain profitable at the company level.
In many cases, a company is reaching break-even when the ROAS is around 400% and the goal is 800%. Of course, not all Paid Ad campaigns have the immediate objective of increasing direct revenue. Some of them are meant to boost things like brand awareness, engagement, email subscriber campaigns, etc.
ROAS calculation sample
Imagine you are running two online campaigns and you get these results:
- $30 Cost per Conversion
- 150 conversions
- $80 Cost per Conversion
- 80 Conversions
At first glance, it seems clear that campaign A is, by far, the most successful, if Cost per Conversion is your main outlook indicator. But if you use ROAS analysis, you can come up with a very different result:
- $30 per conversion
- 150 Conversions
- Total ad spent – $4500
- Average Order Value – $50
- Total Revenue – $7,500
- ROAS= 1.6X (160%)
- $80 Cost per Conversion
- 80 Conversions
- Total ad spent – $6,400
- Average Order Value – $300
- Total Revenue – $24,000
- ROAS= 3.75X (375%)
Now it becomes clear that Campaign B was actually better succeeded, generating much more profit for your company, even if the cost is bigger.
Do you still have questions about the profitability of your campaigns? Send us a message and we’ll help you figure out exactly how well you’re doing in your vertical!