Written by: Silvia Myers, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
ROAS is one of the most important success metrics for your online store and understanding what is a good ROAS for your business and how can you improve it will help you create a lasting, profitable online business.
What Is ROAS?
First of all, what is ROAS? It’s a mouthful to pronounce in the first place. ROAS is essentially an abbreviation. It’s short for “return on ad spend.” Still doesn’t make any sense? That’s okay, we’ll go through it step by step.
By the time you finish reading, I’ll make sure you understand what is a good ROAS specifically for your business in general – and not just what is a good ROAS for Facebook ads.
Once again, ROAS is a marketing metric that calculates the effectiveness of your ads. The reason why understanding it is key is that as a business owner, you need to be able to decide what’s working for your business and what’s not working so that you can grow, budget, and make strategic decisions. In other words, return on ad spend is simply a calculation comparing how much you spent on your ads in total, compared to how much money you made from those ads.
Just for disclosure, ROI stands for return on investment, and ROAS is not the same thing. This is because your ROI puts into consideration all investments made in your business.
ROAS is looking at only one ad at a time. And this is the tricky part that can mislead business owners, making them believe that their ROAS is good whilst, in reality, their ROAS might be hurting their business, but I’ll explain this further below when I talk about the three levels of what could be considered a good ROAS.
To Understand What’s A Good ROAS, You Need To Know How To Read And Calculate It First
Most commonly, you’ll see ROAS being displayed in numbers varying from zero onwards. The highest ROAS I’ve ever seen has been close to a hundred, but more on that in the below section.
First of all, the basic rule for any business is that the higher ROAS the better for your business. But the actual ROAS benchmark and what’s considered good varies from business to business.
The most simple calculation of ROAS is taking the total revenue you got from an ad and dividing it by the amount you spend on the ad.
A high purchase ROAS means that your advertising brought in a lot of revenue, and a low ROAS simply means that it did not bring a lot of revenue.
Once again, a ROAS of 1.0 means that for every dollar you spent on an ad, your ad earned you one dollar back. But don’t get fooled. This doesn’t mean that you’re breaking even, so it’s super important to understand what’s a good ROAS.
Also, to be clear, ROAS of less than 1 (one) means that the ad earned less revenue than what it cost. Once again, it has nothing to do with profit.
So What Is A Good ROAS Specifically For Your Business?
Lots of business owners want to know what’s a good ROAS for their industry to get an understanding if they’re doing well or not. However, comparing your business to the industry can be very dangerous because it can be very misleading to what it takes to make a profit for your business.
The reason for that is because each business has different expenses and a different way of running its operations, and so the only metric you should be interested in to understand what’s a good ROAS specifically for your business is what’s called a breakeven ROAS.
Break-even ROAS is the only metric that will be helping you understand how you’re doing and if your ROAS is good or not. If your actual ROAS is higher than your break-even ROAS, then that’s good because then, and only then, your business is making money.
If your actual ROAS is lower than your break-even ROAS, then that’s not very good because it means that you’re losing money, and you either have to improve your ads so that they are more efficient or you have to cut your operational costs to make the production of your products or services cheaper to deliver.
Let’s deep dive into this break-even ROAS thing.
What Is A break-even ROAS and how does it relate to what’s good
Breakeven ROAS is the only metric that will give you an understanding of whether your ROAS result is good or not. Because it takes into account all of your costs, not just the ad costs, and it considers your total revenue, not just the revenue from one campaign. It will also help you understand how much can you actually afford to spend to acquire a new customer. That’s what makes this metric so powerful and doesn’t just give you the answer to what’s good or bad but also how competitive you are and how far and how fast can you go with your business.
Let me give you an example. Let’s say that you have a fashion store and you actually manufacture your own products. So first of all, you have to buy some fabric and then take into account the costs of making the clothing, including the equipment you use, the utilities you use along the way, rent you pay for your office or warehouse, and also any staff members you might be paying to produce these products. Last but not least, also consider how much is your time worth when you’re creating these products.
Once the product is finished, also consider other costs of running your business, such as hosting of your website, your ecommerce store, any fees you pay for transactions, and so forth.
There are many costs involved in designing, making and delivering a product to your customer and most entrepreneurs forget to think about it when they want to calculate what’s a good ROAS for their business. The best way to find the total costs for your products is inside your accounting or bookkeeping software, regardless of which one you use.
So now that you have your total costs, also think about the total revenue. Are you selling physical products only that are one-off, or are you selling memberships or services? Do your customers tend to come back?
The reason why I’m asking is that to calculate what’s a good ROAS for you, besides the overall costs, you also need to consider the overall revenue potential.
For example, if you have a solid twenty percent of returning customers who come back to you over and over, then you consider the total potential revenue from a campaign, not just the first sale you made but actually what’s the total potential of that customer.
In this case, you might be more comfortable spending money on ads because you will be confident that anything you spend on ads will deliver a return on investment for your business, even if your first purchase ROAS is a little lower because it’s got a huge long term potential.
In general terms, the lower your break-even ROAS, the more profitable is the business. This is the key to deciding for yourself as to what’s a good ROAS for you.
For example, if your break-even ROAS is 3.0, it means that for every dollar you spend on advertising, you have to receive a minimum of three dollars in revenue. Otherwise, your business will be losing money.
Ideally, you want to make sure that your break-even ROAS is as close as possible to 1.0, which in other words, means keeping your operational costs low and the efficiency of your marketing campaigns high.
Depending on what business you’re in, this could be easy or harder for you to influence. For example, if you’re in dropshipping, then your costs might be increasing on an ongoing basis, or if you’re in a competitive industry, then the ad auction system might be getting more expensive and push the cost of each click up, leaving you with little space to influence this.
Now that you know that a good ROAS for your business is the one that’s profitable, which means higher than your break-even ROAS, it's time for you to go and implement what you learned. Dive deeper into your accounting system, your marketing campaigns, and your revenue dashboard to see what’s a good ROAS for your business and if you need to make any adjustments.
Once you’ve done that, just let me know your insights, as I love hearing your success stories.
Silvia Myers, Executive Contributor Brainz Magazine Silvia Myers is co-founder of Traffic Ninjas, teaching product makers and brand builders how to sell their incredible products online without having to discount or spend their hard-earned cash on things that don’t work.
Together with her husband and co-founder, Kristen, Traffic Ninjas equip eCommerce stores with an underground Ninja method specifically designed for small business owners, teaching them how to be profitable and sustainable and actually earn an income from selling their products.
The Traffic Ninjas community has grown from Sydney, Australia to 35+ countries around the world with small business owners achieving amazing results.
