What does ROAS mean or how to determine whether your E-comm’s marketing is even profitable
ROAS (Return On Ad Spend) or in local terms: “Return on investment in advertising”
Gone are the days when you did an online store and only dealt with running a store. The online presence on which the online store builds has become a dynamic element of any serious online sale.
As a beginner, you have a hard time getting to the first page of google, so you have to go for advertising, social media, email marketing and influencers.
Of course, as the responsible owner of an online store, it is clear to you that you are looking at two basic numbers at the end of the month: expenses and revenue.
However, to make it easier to plan your activities and consequently sell online, you need a metric that can tell you right away whether you are effective in marketing activities or not.
- Cost per click
- Click-to-click ratio
- Cost per purchase
and similar metrics are some basic indicators of the success of your online activities.
At the same time, the digital world is becoming increasingly intertwined with more complex elements such as data segmentation, customer cohorts, remarketing funnels, and so on.
How can you so easily know what is worth investing in and where you are marketing effective at all?
In a sea of activities, channels and metrics, you need a simple coefficient that reveals the effectiveness of your marketing.
ROAS (Return On Ad Spend) or in local terms: “Return on investment in advertising” is therefore one of the most basic, simple metrics in the world of online stores, which can immediately show you the profitability and meaningfulness of individual advertising activities.
How is ROAS calculated?
The formula is quite simple: Divide the generated traffic by the money invested and get the ROAS quotient. This indicates how many euros we get, for every euro invested.
Why is this such an important number?
Because it indicates the profitability of individual campaigns. When you work with multiple campaigns on Facebook, Instagram, search campaigns and possibly even influencers – your marketing budget runs out very quickly.
The question you need to answer on a regular basis is: which channel, ad, audience, product or other element of online sales is profitable at all.
While diligently counting turnover at the end of the month and subtracting the money invested in marketing over your eye, you may be missing out on the most obvious opportunity; campaign optimization. ROAS can tell us right away what is worth investing more money in or where it can be reduced.
OK, my ROAS is 3.5. Should I laugh or cry?
Either way, smile, you’re just about to discover if your marketing is profitable or not.
The key to whether the ROAS is positive or not is your margins or. ability to make money on advertising activities.
Let’s take an example. You sell shoes in your online store. Because you are one of the suppliers and not the manufacturer, you have an average margin of about 80%. So for a pair of shoes sold for € 100, you actually earn € 40.
With an investment of € 100 in advertising, which is converted into a few hundred euros in turnover, a quick calculation tells us the following:
ROAS 1: € 100 deposit in € 100 turnover, balance: -60 €
ROAS 2: 100 € to 200 € (two pairs), balance: -20 €
ROAS 3: € 100 to € 300 (three pairs), balance: € 20
ROAS 4: € 100 to € 400 (four pairs), balance: € 60
ROAS 5: € 100 to € 500 (five pairs), balance: € 100, etc. …
Download your ROAS table here.
It quickly becomes apparent that it really pays to invest a budget in online advertising only in the case of ROAS 4 or more, which in this particular case means that for every € 100 of marketing budget invested we would have to sell at least 4 pairs of shoes or more.
For this purpose, the ROAS formula is often adapted in:
ROAS = (traffic – advertising cost) / advertising cost
Because it tells us the actual profitability of the campaigns – that is, how much € you earn for every € invested, instead of how much € you get for every € invested.
Then VAT must be deducted from the sum, preferably delivery costs or production / operating costs, which ultimately brings a profit – or as we call it in marketing jargon RVC.
Of course, this does not mean that ROAS is calculated only by channel. As a universal metric, you can apply it to your demographics and different segments (e.g. what ROAS is on men and what on women, December vs. April, lifestyle vs. product creative, A version of the website vs. B version of the website.
Ok, we found our ROAS to be bad. How can I improve it?
The basis for improving ROAS is testing different things. Eg. improving one of these elements:
- video content from users who use the product
It will make advertising cheaper – lower the cost per click and thus increase ROAS.
In the purchase decision step, you can make the following improvements:
- user experience of the site
- add better product descriptions or images
- simplify the cart
- add more payment options
- change CTAs
improve page conversion. This means that a higher percentage of people who come to the online store will end up making a purchase.
These are e.g. only the most basic ways to improve ROAS. If you have already tried this and need help – describe your project to us and we will help you.
Bighead Lab is a performance agency dedicated to the overall growth of online sales.