What is ROAS and how to count it?
Online ecommerce advertising is an important tool for anyone who wants to improve their business performance. Choosing the right tool to measure the effectiveness of sales from online ads can be a difficult decision, especially if you are not familiar with the concept of ROAS (Return On Ad Spend). Let’s take a closer look at this parameter and find out why it is so important If you are selling online.
What is ROAS?
ROAS stands for Return On Advertising Spend, or return onadvertising investment ratio. ROAS is calculated as the ratio of the amount of sales to the cost of advertising. The ROAS value can be most simply interpreted as the efficiency of investment in advertising i.e. the higher the ROAS value, the better.
How to calculate ROAS?
Counting ROAS may look complicated, but after dissecting it, you will find that this ratio is simple to calculate and describes the efficiency of operations in an accessible way. The simplest formula for counting ROAS looks like this:
How to calculate it? This will be best illustrated by an example. We are running an advertising campaign and have spent PLN 100 on it. The users who were acquired made purchases in the store in the amount of PLN 1,200. By substituting these values into our formula we get: (1 200 zł / 100 zł) * 100% = 1 200% 1 200% of the result means that every zloty spent on the campaign generated 1 200% of its value, i.e. returned 12 times.
What should the ROAS be?
The ROAS result can be divided into 3 main ranges: ROAS from 0% to 100% – The campaign is not profitable, we are subsidizing sales. As long as the sole purpose of our activities is to generate revenue from the campaign then it is not fulfilling its purpose. We can get such a result on single, worse days, but if this condition persists for a longer time we should consider stopping it with changes. ROAS 100% – The campaign comes out at zero. Unless we have additional costs we are not making money on it. ROAS over 100% – The balance of the campaign is positive. Every zloty spent on advertising translates into revenue. As long as the resulting surplus is greater than the other costs of the product then the campaign can be judged as good.
How to determine the minimum ROAS
The mere fact that ROAS is greater than 100% does not yet make our store generate a profit thanks to the advertising campaign. Keep in mind that there are many factors and costs to consider. Acceptable or even achievable ROAS can vary depending on the product we offer, its price, audience, the margin we have from its sale. For example, trading in clothing we will have different results for women’s jackets and others for men’s jackets. Offering more expensive products, the acceptable ROAS will be lower than when we sell a cheaper range. If we are a sales intermediary the acceptable parameter will be higher than when we are a manufacturer of a product. When determining the minimum ROAS, we should check how much it costs us to acquire the product, what additional costs we have to amortize, what profit we want to get for ourselves. Example. We are an intermediary selling electronic equipment. Our margin is 20%. The average shopping cart is worth PLN 5,000. It follows that, selling a product for PLN 5,000, we earn from a margin of PLN 1,000. In such a situation, allocating all the funds to the campaign, we will come out at zero if the ROAS is 500%. I am not counting the bills we still have to pay or the money we will need for living. ROAS of 500% should then be the limit below which it is not worthwhile for us to operate. If we manage to achieve a ROAS of 1,000%, it is enough for us to spend 500 PLN on a campaign that will sell products for 5,000 PLN. We are then left with PLN 500 in our pocket, which we can consider as our profit.
Just as we looked at the margin in this case, so should we consider production costs. If we are, for example, a furniture manufacturer. We sell our products at PLN 5,000 each, but the materials to produce them cost us PLN 4,000 then, as in the previous example, we are left with PLN 1,000 to spare. The basis is to determine our costs and include them in our sales plans.
Does ROAS always work?
ROAS is a parameter that averages the results of a campaign. It allows us to determine the direction of our actions and the assumptions we must stick to. When running campaigns, always remember that ROAS is not always feasible. Exorbitant campaign assumptions may clash with actual demand for the product, which may be too low to achieve an acceptable result.
There are many influencing factors. Audience groups, seasonality or competitive activity are just some of them.
