What Is ROAS (Return on Ad Spend)
Return on ad spend (ROAS) is an extremely important metric for eCommerce owners utilizing any type of online advertising. It measures the revenue earned from advertising divided by the ad spend.
If you spend $50 on Google Shopping for your business and earn $150 in revenue, your ROAS would be 3 ($150 Revenue / $50 Ad Spend = 3). This means that for every dollar you spend on advertising, you earn $3 back.
What Is A Good ROAS For Advertisers?
Our agency deems a 3:1 ROAS to be a good one. This means for every $100 you spend, you generate $300 in revenue.
When you hover below a 3:1 ROAS, lower profitability comes into the equation.
Table of Contents
- 1 What Is ROAS (Return on Ad Spend)
- 2 What Is A Good ROAS For Advertisers?
- 3 Where To Find ROAS Metric
- 4 Bing
- 5 Finding Top Performing ROAS Channel
- 6 Unrealistic ROAS Expectations
- 7 Importance of Profitability
- 8 Other Expenses Aside From Advertising
- 9 Importance of Repeat Customers
- 10 It’s Not All About ROAS
- 11 In Closing
Where To Find ROAS Metric
Below are screenshots from our ad accounts for DermWarehouse, our in-house eCommerce brand. This will help you understand how to view the return on ad spend from each respective ad account. The ad accounts listed below are Google, Bing, Amazon, and Facebook/Meta.
- Columns → Modify Columns → Conversions → Conv. Value / Cost
- Columns → Modify Columns → Conversions → Return on Ad Spend
Facebook Ads Manager
- Custom Columns → Search for “Purchase ROAS (Return on ad spend)” → Apply.
- Columns → Customize Columns → Search for ROAS
Finding Top Performing ROAS Channel
Google, Meta, and Amazon account for 65% of all digital ad spend (source). You will likely have top-performing and lower-performing channels for your business. It’s important to allocate ad spend accordingly based on where you achieve your highest ROAS.
For DermWarehouse, we’ve seen a much better return on ad spend on Google and Bing than on social media. Because of this, we invest a lot more money in those channels, although we still leverage social media for our retargeting ads.
Unrealistic ROAS Expectations
Many eCommerce store owners have unrealistic expectations for their return on ad spend. Businesses think they should get a 7:1 or 8:1 ROAS, meaning that for every dollar they spend, they expect to make $7 or $8. While, in theory, this sounds great, often, it isn’t realistic.
In the early days of eCommerce, this sort of ROAS was more of the norm. As the online landscape has become more competitive, it’s harder to achieve these benchmarks.
The more niche of a product you have with less competition, the more likely you will achieve a stronger ROAS.
Importance of Profitability
Every eCommerce business aims to be profitable. The ROAS metric is so important as it helps gauge overall profitability. If you operate below a 2:1 ROAS, it will be challenging to be profitable and keep your business afloat, however, your target ROAS will depend on your margins and what profitability means for your business.
Don’t just take my word for it. Shopify stated that “Retail stores live (and die) by how much profit they make.”
Other Expenses Aside From Advertising
Many other expenses come into play when running an eCommerce business outside of advertising. You must consider other costs when analyzing your return on ad spend.
If you ship products out of your parent’s basement and have extremely low overhead as a one-person operation, you can afford a lower ROAS. If you have a large staff and office space, plus offer free shipping, you must aim for a higher ROAS to ensure overall profitability.
Below are eCommerce expenses that can eat into overall profit:
- Cost of Products
- NYU’s Stern School of Business reports an average of 41.54% gross profit margin for eCommerce businesses.
- Cost of Employees
- Employees are one of the biggest overhead expenses. There is a ratio called RPE (revenue per employee) that should be taken into account.
- When you have an eCommerce business, you likely have warehouse space or utilize a 3PL company. This is another expense.
Importance of Repeat Customers
Earlier, I mentioned going below a 3:1 return on ad spend is risky as low profitability comes into the equation. There is a caveat to this. If your business gets a lot of repeat customers, you can afford to have a lower return on ad spend.
Our agency is unique in that we’ve built a seven-figure eCommerce brand in DermWarehouse. On average, our ROAS is about 2.5 to 1, meaning for every $1 we spend, we make $2.5. Considering our margins are about 50% on average, this ROAS doesn’t seem great. There is a caveat to this. 40% of first-time buyers become repeat customers, with the majority signing up for ongoing subscriptions. We’re not that profitable on the first order, but once we get customers into our funnel, they have a high customer lifetime value (CLV)
If you have an eCommerce business with a high repeat order rate, you can afford to spend more up-front.
It’s Not All About ROAS
Branding is a big part of marketing. 94% of consumers say they recommend brands they emotionally connect with. Exposing people to your product, sending them to your website and entering the prospect into your retargeting and email marketing funnel is important. Not all of these people will convert right away and contribute positively to your ROAS. Many marketers don’t think long-term about the brand and only focus on the ROAS, which is short-sighted.
Earlier, I showed you how DermWarehouse has a 27:1 ROAS on Google Ads for the brand. This is because, over time, people have become exposed to our eCommerce company and continue returning to purchase from us. Never lose sight of growing the brand while still being cognizant of ROAS.
- Many business owners and marketers have unrealistic expectations when it comes to ROAS. Anything above a 3:1 is considered good in our books.
- ROAS measures the revenue earned for every dollar spent on advertising and is a great metric to look at when determining the success of your ad campaigns.
- Google, Meta, Amazon, and Bing are some of the most common online advertising channels where ROAS is tracked.
- While ROAS is very important, it shouldn’t be the end-all-be-all metric you consider. Make sure you’re thinking long-term about lifetime customer value, repeat customers, and brand exposure when deciding on ad spend and budget.
I hope you enjoyed this article! If you have any questions on eCommerce or digital marketing, contact The Media Captain for a free consultation!