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What Is Considered A ‘GOOD’ Return On Ad Spend (ROAS): An Analysis for E-Commerce Businesses

By November 8, 2020No Comments

Whether you’re running an e-commerce business on your own, managing a team, or part of a team that’s in charge of sales and scaling the business, you’re north light to achieve success, for many, is ROAS.

It’s important to note that many businesses have different goals. Not all businesses are built for profitability or really care about ROAS as a KPI (key performance indicator.) An example might be a start up that raised capital to build a database of customer or lazer light focused on top line revenue without regard for bottom line losses.

Even if that’s the case, I can tell you, ROAS eventually comes around to be a KPI that matters to all digital businesses as it tells us how good our ad spend is performing and where to scale, and actually where to scale BACK.

It’s an important metric to keep a close eye on, even if it’s not a key metric for you or your team as its a great indicator of ad performance.

For other business, that need and focus on profitability, ROAS is king. It’s what you’re constantly optimizing for, at-least what’s guiding ad campaigns to scale, pause, etc.

ROAS should be and can be calculated on the following:

  • Overall digital marketing spend
  • Channel / Traffic source level
  • Campaign level
  • Ad group level
  • Keyword level

This allows you to break down performance at all levels of your marketing. Again, all this depends on your business goals and strategy.

Most channels, be it Google Adwords, Facebook Ads, and other big ad platforms have ROAS fields that calculate it for you.

So now that we touched on that, let’s start…

WHAT IS ROAS?

ROAS (return on ad spend) is a marketing metric that measures how much your business earns in revenue for every dollar spent on marketing or advertising.

While ROAS is similar to ROI (return on investment), ROAS looks specifically at the cost of an ad campaign, versus the overall investment that might be counted in ROI.

DIFFERENCE BETWEEN ROAS AND ROI?

  • ROAS measures your average return from advertising.
  • ROI measures your total return from advertising.

HOW DO YOU CALCULATE ROAS?

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.

REVENUE / ADVERTISING COST = ROAS

HERE is a ROAS calculator.

WHAT IS CONSIDERED A ‘GOOD’ ROAS?

A “good” ROAS depends on several factors, including your profit margins, industry, and average cost-per-click (CPC). Most companies aim for a 4:1 ratio — $4 in revenue to $1 in ad costs. The average ROAS, however, is 2:1 — $2 in revenue to $1 in ad costs.

The 4:1 ratio has become somewhat of the standard in the industry. This is just a default we go to as we can determine some level of performance from ad spend. As I’ve been saying, a good ROAS might be 1:1 for a business just looking at top line growth as a good ROAS, other’s might be doing calculation of break even ROAS to determine good ad success across all channels.

The ROAS is all about margins. The higher your margins are, of course, the higher you can spend on advertising to scale sales.

Pablo Palatnik

Pablo Palatnik

Pablo Palatnik is an industry veteran in e-commerce & digital marketing with over 20 years experience. He successfully built and sold businesses; he now serves as the VP of Global E-Commerce for cosmetic dermatology brand DS Laboratories. Pablo is the Founder of Etrend.com.

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