Success is a mountain summit and ROAS in eCommerce is your Sherpa guide. You need both to get to the top. The estimated digital ad spending in the US will be around $190 billion in 2021, a 25% growth from last year. Although eCommerce brands are diversifying their acquisition channels, ads (mainly on FB, IG, TikTok, and Snapchat) remain the top channel. And, the best metrics to figure out whether an ad is working? Return on ad spend.
That’s right – ROAS can help you figure out answers to burning questions like: How do you find out the cost of paid traffic? How much revenue is generated from every penny that you shell out to get shoppers to your website? What is the first metric that marketers measure to define the success of an eCommerce ad campaign? Goes without saying, you need to keep a close eye on your return on ad spend, but that's only a part of the larger picture.
Digital ad spending is rising at a steady pace. As a result of this heightened competition, few retailers witnessed an increase in their online ad costs by 89%. If you notice that your average ROAS for eCommerce is dropping, this could be one of the contributing factors. When it comes to budget planning and eCommerce strategy, ROAS is often viewed as a north star metric (a myth we later debunk). That shouldn't be the case as ROAS is not equipped to handle these areas. As a marketer, you are always looking to positively influence the behavior of consumers. ROAS falls short here and does not help you gauge if consumer behavior has changed in the first place. In this blog, we are going to take a closer look at:
Return on Ad Spend (or as we lovingly called ROAS) is a marketing metric that evaluates how effective an advertising campaign or strategy is. eCommerce ROAS is a key metric that lets you know if your marketing channels are worth the investment or not.
The metric can also be used to compare one marketing campaign with another to help you identify which one of them is performing better.
The ROAS calculation is fairly simple. All you have to do is divide your ad campaign's total revenue by the total cost incurred on it.
For example, if a clothing line spends $ 20,000 on a Facebook Ad campaign and generates $80,000 in revenue. ROAS = 80,000 / 20,000 = 4:1, which simply means that for every dollar spent on the campaign, $4 was generated as revenue. The ROAS calculated for a single channel like a Facebook Ad campaign is known as single channel ROAS. But, if you want to know how all of your paid channels have performed you will need to calculate the blended ROAS. In this ROAS calculation, you take into account total revenue earned from all your paid channels like Facebook, Google, or Snapchat and divide it by the total eCom ad spends incurred on those channels. The formula for blended ROAS is pretty straightforward.
It is not easy to define what a good ROAS is. For some a ratio of 4:1 is brilliant, for others, it might indicate failure. There are a few factors to consider to determine what a good ROAS is. They are:
Most companies aim to achieve a ratio of 4:1. However, the average ROAS is around 2:1 which means you make $2 in revenue earned for every $1 spent in eCom Ad costs. While startups may need a higher ROAS to cover costs and achieve financial growth, established companies can survive if the ROAS is low.
There are quite a few ways in which ROAS in eCommerce differs from ROI. Before we take a look at the differences, let's understand what ROI is. ROI stands for return on investment. It is a metric used to determine the total profits made from investments. A business needs to track both these metrics. The ROAS lets you know if a campaign has been successful in creating clicks, impressions, and revenue. What the ROAS fails to reveal is whether your paid ads department is profitable for the company. This is where ROI steps into the picture.
Take a look at the fundamental differences between the two metrics:
Table 1 showing the difference between ROAS and ROI
Not sold on how ROAS can be an important metric for your online business? Here is why you need to keep track of this metric:
It monitors the average performance and returns on your ad campaigns. You will obtain accurate data to support changes in the campaign budget or an increase in ad spends. It will help you identify which campaigns are performing well and which are not. Advertising is often the most expensive component of an eCommerce strategy. If a campaign isn't doing well, your marketing team needs to know that quickly and the average ROAS in eCommerce gives you that information.
Google is a powerful platform that provides an average eCommerce ROAS of 13.76. Due to its high ROAS potential coupled with low budget requirements, we recommend that all our clients use Google Ads. With adept targeting and extensive user base, you'll be mistaken if you don't invest in Google Ads.
Coming in second is Facebook with an average eCommerce ROAS OF 10.68. The popular social media platform boasts a user base of over 2.6 billion people, making it an ideal place to advertise your products or services. Plus, with its efficient targeting features, you can rest assured that your ads will reach the right audience.
Although not as popular as Google or Facebook, Instagram is a powerful eCommerce tool with an average ROAS of 8.83. The photo and video sharing platform is known for its creative content, which is why it is perfect for promoting products that are highly visual in nature.
With an average eCommerce ROAS of 2.7, Twitter is a cost-effective platform for small businesses with limited budgets. The social media site has a wide range of users, which is why it is perfect for businesses that are looking to reach a large general audience and build brand awareness. However, while it may be effective in building brand awareness, driving conversions on this platform may be a challenge.
The average eCommerce ROAS of Pinterest is 2.7 so it is on par with Twitter. If your target audience is mostly female, then Pinterest should definitely be a part of your eCommerce marketing strategy. Building brand awareness on Pinterest is relatively easy as compared to other social media platforms.
Here’s the thing: I know multiple agencies and in-house marketers reported on ROAS as their primary metric. Now, this was fine as long as attribution was alright.
Blended ROAS is dead.
However, now the variations in reporting are so large that the metrics are causing a misdiagnosis of true channel health. This leads to the inefficient deployment of spending, causing even further performance degradation to the ecosystem. Attribution is broken (and will be so in the foreseeable future).
Also, ROAS cannot be used for fixing budgets either; especially when you have promotional events or a sale underway. During a sale, most of the people you target will find your product affordable and will click through your ads. ROAS calculation done in this case will be inaccurate. The average eCommerce ROAS is important but if it is the only metric you calculate, the results will be misleading. The ROAS calculation only takes into account the advertising costs but there are many other expenses that a business incurs like shipping, storage, production & maintenance. You need to optimize every area of your business to make a profit.
That is why you need to calculate it alongside other important ecommerce metrics like cost per click, ROI, and AOV.
Once Triple Whale went through inordinate amounts of data from a kaleidoscope of Shopify stores and millions of dollars of eCom ad spend, we identified a new growth formula:
Let’s look at each of these ROAS eCommerce types and understand why they’re the right choice in 2022 to measure eCom success.
eROAS or MER
eROAS or Ecosystem ROAS is more popularly known as MER (marketing efficiency ratio). It gives you an indication of how successful your marketing ecosystem is. It shows you how effective your ad dollars are.
With eROAS you can approach the head of finance or the CFO of your company to understand how much money can be spent to earn X amount in revenue.
If they say you can spend up to $50,000 a month and earn a revenue of $250,000, you will know that your eROAS target is 5 [eROAS = Total revenue ÷ Total ad spends = 250,000 ÷ 50,000 = 5]. If your eROAS dips below 5, you have overspent, above 5 and you are underspent.
New customer ROAS shows you how efficient your marketing efforts are in generating revenue from new customers.
If your new customer ROAS is diminishing you are not successfully adding customers to your business.
Profit on Ad Spend or POAS
POAS indicates the total profits generated from the existing marketing efforts.
This ROAS calculation is going to tell you if you are driving the right products. It helps you understand if you are allotting ad spending for the right products to drive profitability for you or your clients’ business.
Let's get to the most important part now. We are going to give you the two best possible ways to track the ROAS. Here they are
This is the standard way of computing the ROAS where you add all the figures to a spreadsheet and obtain the result using formulae in a spreadsheet.
Triple Whale is the #1 ecommerce analytics platform that centralizes important metrics like all three types of ROAS, net profit, AOV, email marketing sales, and a lot more. That’s not all – you get to see all the metrics in one clean dashboard, send daily reports to your email/slack channel, or simply check out the health of your store right from your mobile app.
There are a lot of strategies to improve this metric. Lowering your ad spend and reviewing your ad campaigns are ways to improve the ROAS. Optimizing landing pages, using the right keywords, and including a strong CTA are other tactics known to improve ROAS. Once you start tracking this metric you will know how effective your marketing efforts are. Take time to look at how you can get the best return on your investment through the ROAS calculation.
It's time to take your business to the next level by centralizing and your eCommerce analytics. TripleWhale is here to help you get the insights you need to make data-driven decisions and grow your business.
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