As an eCommerce business, paid advertising is very likely your biggest source of new customer acquisition or at least in the top contenders.
When it comes to effective eCommerce advertising, the ratio of spend and return is an important one. This ensures that you’re not just generating revenue but also profit.
As the old saying in business goes:
“Revenue is for vanity, profit is for sanity, cash is king”
Return-on-ad-spend or ROAS for short, is a frequently cited metric as the measurement of success.
This means for every £1/$1 you spent, you generated £x in return.
ROAS is most commonly shown as a percentage, ratio or value, as shown in the examples below:
- 400%
- 4:1
- £4 / $4
In all instances, it means that you returned £4/$4 for every £1/$1 that you spent on advertising.
Why calculate ROAS for eCommerce?
Understanding what your ROAS needs to be is an important step in growing in a sustainable and profitable way.
Before increasing investment levels, you want to know that doing so is going to lead to profit.
A profitable return-on-ad-spend, will vary from business-to-business and product-to-product.
With so much nuance to account for, it’s not always the best option to use benchmarks as whilst they might work for one business, they may not work for yours.
What is the best ROAS for eCommerce?
The best ROAS will vary widely depending on the AOV of what you sell, your conversion rate, gross margin and the base cost of the clicks that you are buying.
If you sell higher ticket items, you will naturally see a higher ROAS due to how the metric is calculated (revenue from ads / cost of ads).
As a starting point, getting a campaign past 2:1, the point where it is covering ad spend would be a milestone worth noting.
This of course isn’t a measurement of success though, given it doesn’t take into account product costs, margin and other factors such as return rate.
We need to calculate ROAS based on the nuance of your business and products.
Is a 400% ROAS good?
From a marketing benchmark perspective, a 4:1+ return would be considered good. We need to account for product margin though so we need to dig a little deeper.
Taking a simple framework, your average-order-value, and ROAS could be the same, however, if your margins are significantly lower or higher, then optimising for the same target isn’t likely to be effective.
Business 1 – 4:1 ROAS
AOV: £80
CPA: £20
ROAS: 4:1
Margin: 60%
Margin value: £48
Profit per sale: £28
Business 2 – 4:1 ROAS
AOV: £80
CPA: £20
ROAS: 4:1
Margin: 35%
Margin value: £28
Profit per sale: £8
For business one, this 4:1 ROAS is likely viable. For business two, this may not be the case.
How do you calculate ROAS for eCommerce?
We’ve made this super easy - simply use our calculator and we do the hard work for you!
Our calculator will allow you to input your spend, revenue, number of orders and approximate gross margin.
- This will then calculate if your current ROAS is profitable
- What your break-even ROAS would be
- And most importantly, a suggestion on where you should be aiming for.
This means that you can calculate the best ROAS for your eCommerce business.
We always recommend sharing the email PDF version of this report with your finance director before implementing changes to campaigns.
What do we do with our new insights?
When it comes to Google Ads in particular, if you have set a ROAS target that’s too low, the campaign will be trying harder to spend your budget, in the aim of maximising revenue. Cost will be high and you won’t be feeling the profit coming through on the business side.
Equally, if you have set a target higher than it needs to be, you may begin to duck out of auctions where the bidding strategy is deeming it less likely for you to win the click, convert a sale, at the desired target return - which can limit your sales volume.
Take the insights from our ROAS calculator report and share them with your internal team. Compare the suggestions against your current performance and work with your paid media provider to phase in any changes, in a managed way, that doesn’t disrupt performance.
We create momentum
Delivered, measured, built upon
