In one of our previous articles we talked about how Amazon ads are probably worth it for your eCommerce business. But what kind of returns can you really expect from your PPC campaigns?
Without understanding the ROAS metric it can be hard to evaluate your ad performance.
What Is ROAS and How Is It Calculated?
ROAS stands for Return on Ad Spend and it measures how much revenue return you’re getting from your ad spend.
ROAS is a really important metric to understand because it basically tells you whether or not your campaign is working.
The way to calculate ROAS is…
ROAS = Ad Revenue / Ad Spend
As you might have noticed, this is simply the inverse of ACoS which is Ad Spend / Ad Revenue.
For example, if you spend $100 on a campaign and get $500 back in ad revenue then you’d calculate $500 / $100 for a ROAS of 5 or 5X as it is often written.
So, the higher the ROAS the more ad revenue returns you are getting.
On the other hand, if you spend $100 on a campaign and you only make $100 in ad revenue then your ROAS is 1X meaning that you only broke even.
Now, one thing that is very important to understand is that ROAS is only measuring attributed ad revenue. It’s not taking into account all of your expenses. For that, we recommend looking into TACoS. We’ve got a full article on TACoS vs. ACoS.
What’s Considered a Good ROAS?
It can be misleading to simply look at an average ROAS on Amazon and assume that it applies to your situation. You are likely not going to be comparing apples to apples.
For example, the average ROAS can vary quite a bit based on your Amazon category. Product categories with traditionally higher price points, like electronics, will see higher average ROAS than categories like toys & games.
There can even be different average ROAS depending on your match types and the ad type you’ve selected.
So what’s the best way to figure out what a good ROAS looks like for you?
Take a look at your profit margins.
If you have a small profit margin, you’re going to need a higher ROAS for your ads to be profitable. If you have a high-profit margin product, you can achieve a profit with a lower ROAS.
To calculate your gross profit margin, you’ll take your net revenue minus the cost of the item (COGS) as well as any other Amazon feed.
For example…
So that means, before you spend any money on advertising you would take home $10 in profit. This is your breakeven point.
To find the minimum ROAS you can accept you’ll calculate the sales price of your product / your breakeven point.
In our example that would be $20 / $10 = 2X ROAS.
So for every dollar you spend on advertising you’ll need to double it in ad revenue in order to be profitable.
Is a High ROAS Always Better?
It all depends on your goals.
You might be okay with a lower ROAS if you’re…
- Launching a new product
- Trying to move stock quickly
- Trying to increase brand awareness
- Trying to dominate a niche
Essentially, anytime you’re willing to spend a larger amount on ads in order to see a higher chance of returns.
How do you use ROAS in your business?
Did anything in this article spark your curiosity or bring up a question? Comment below or email us at Howdy@PPCFarm.com. We love talking about PPC!
