ROAS. The holy grail of a performance / growth marketer. Understanding and working on and toward this metric helps scale or a business. It’s critical to understand a businesses financials and where the sweet spot is for sustainability in terms of growth when working with ROAS. The best marketers, or should I say performance/growth marketers, are those who are not only creative but have a good business sense. If you’re just starting your own e-commerce business, than you’re just doing everything yourself.
WHAT IS THE ROAS FORMULA?
ROAS equals your total conversion value divided by your advertising costs. “Conversion value” measures the amount of revenue your business earns from a given conversion. If it costs you $20 in ad spend to sell one unit of a $100 product, your ROAS is 5—for each dollar you spend on advertising, you earn $5 back.
100/20 = 5 therefore, 5:1 ROAS
BEFORE WE GET TO THE SIMPLE RULE…
It’s important to note this is a very basic, rule of thumb. However, every business is different and has different targets in order to turn a profit and have sustained ad spend. Different businesses have different growth goals and strategies. ROAS can always increase with decreased spending, but of course, in order to grow, you’re going to have to find a way to spend as much as possible while sustaining a target ROAS.
Another thing to consider here with this rule is margins. Your product margins may allow for these metrics to be somewhat different as a basic metric. High margins allow for much lenient returns to make your marketing profitable.
For example, If your margins are high, a return of 2:1 is ‘acceptable’. To follow along, you should use an ROAS calculator. However, if your margins are a bit tighter, you might need something more along the 5:1 line.
SIMPLE RULE OF THUMB FOR ROAS
- If your ROAS is below 3:1, rethink your marketing. You’re probably losing money.
- At a 4:1 ROAS, your marketing is turning a profit.
- If your ROAS is 5:1 or higher, things are working pretty good.