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A Deep Dive Into E-Commerce Return on Ad Spend (RoAS)

Do You Get Return on Ad Spend? 

As an e-commerce business owner, you know how important it is to spend money on ad campaigns. Very few e-Commerce business can survive on organic traffic only.

You will probably see your revenue increase during these ad campaigns. But how well are your ads doing compared to others? And are they a good investment? Do they achieve all the sales potential? And should you actually launch ads in Google, instead of Facebook or Instagram?

To understand these questions—and to put your whole ad campaign moves into perspective – you need to dive into the numbers of Return on Ad Spend (RoAS).

Spending on ads without RoAS insights is no difference to gearing up the car while you are driving with eye blindfolded. You may miss out opportunities or worse putting your business in danger.

So, what is RoAS? And how should we approach the RoAS metrics

Return on Ad Spend Title Image

What Is Return On Ad Spend 

Return on ad spend is an e-commerce metric that measures the effectiveness of your ad campaigns and their raw profitability. Here is the formula for calculating return on ad spend:

RoAS = (Revenue – Total Ad Spend) / Total Ad Spend

This formula works across all advertising media such as:

  • Google Ads
  • Facebook Ads
  • Youtube Ads
  • LinkedIn Ads
  • …and more

The typical ad campaign will include costs associated with running the ad campaign but that are not part of the actual platform costs. For example, you might spend money on design and ad copywriting in order to run an ad campaign on Google Ads. These additional costs, while important, are not included in the calculation of RoAS.

Here’s an example of how we’d calculate e-commerce RoAS in practice. Suppose you spent $3,000 on an ad campaign on Google Ads. Using your e-commerce checkout statistics and tracking via Google Analytics, you see that the campaign generated $15,000 in sales.

Your RoAS, therefore, is 4x i.e ($12,000 / $3,000). 

It’s common to also state the RoAS as a percentage, in which case, for this example it would be 400%. Some platforms, such as Google Ads, calculate RoAS a bit differently, so pay attention to the definition used on your ad platform.

Why Does Return on Ad Spend Matter 

RoAS is a critical first step for measuring your ad campaign results. While running ad campaigns seems like a silver bullet for generating e-commerce sales on demand, ad results can vary widely. What this means is that you must carefully measure everything to see if you are getting the most bang for buck.

In a typical ad campaign, you will see a variety of really granular metrics available in your ad platform. Such metrics include:

  • Total impressions – The number of people who saw your ads
  • Total traffic – This tells you how many visitors clicked through to your store
  • Clickthrough rate – The percentage of impressions that resulted in the user visiting your store
  • Conversion rate – The percentage of traffic that resulted in a sale

The problem with these granular metrics is that they don’t tell you:

  1. If your ad campaign was profitable at all, and
  2. How profitable was your ad campaign?

In order to figure out if your ad campaign was reasonably profitable, you must calculate your RoAS. This, in some ways, makes RoAS the most important metric for any ad campaign.

A word of caution on prioritizing RoAS. RoAS alone is not enough. To make accurate decisions about your ad campaigns, you need additional metrics for a better picture. In particular, you need to combine RoAS data with gross margin and LTV (lifetime value) data, to understand the whole picture. 

Here is how these other data points will help you:

  • Gross margin – Shows you how much money your business gained from sales after subtracting the cost of goods sold (COGS).
  • LTV – This is the amount of net profit that will accrue to the business from a customer over the lifecycle of their entire patronage of the business.

For example, sometimes an ad campaign might barely break even, so RoAS would be low. However, if your new customers from such campaigns routinely go on to heavily buy your other products, you have a high LTV. As a result, even though the ad campaign does not result in much profit immediately, it’s still worth running it for the future profits it brings.

How To Look At RoAS

Like a host of other important metrics for e-commerce, an acceptable Return on Ad Spend will vary depending on the unique context of your business. 

A low RoAS will work well for a certain kind of e-commerce store while it might be disastrous for another store serving a different niche.

As a general rule, the higher your return on ad spend, the better off you will be from your ad campaigns. This makes intuitive sense. A higher RoAS means you are generating more sales from your ad campaigns, and that obviously means your campaigns are more successful.

Next up, you might want a high RoAS, but if it’s too high, it might be time to spend a bit more on broadening your ad campaign. When your RoAS is exceptionally high, it means your target market is converting very well, sending a signal that the market is ready to buy your product, so much so that you are probably underspending. 

In other words, there might be plenty more people out there ready to buy but your ad campaign is not reaching them. To reach them, you might need to bid more for keywords in PPC auctions or target a wider customer demographic.

As a general guideline, you can consider a RoAS of between 5 and 10 as the general sweet spot for RoAS. Below 4 is too low, whereas if your RoAS gets above 15, you are likely underspending on your ad campaigns. In that case, you could stretch the media buying a bit more and get more buyers while still improving overall store profitability.

Your ideal RoAS will be unique to your store and its type of product. If you have higher gross margins, you can well afford having a lower RoAS. The same applies if your customer LTV is pretty high. 

How To Improve Return on Ad Spend

You’ve reviewed your store’s ad campaign reports and you’ve now identified your ideal RoAS. Now it’s time to optimize RoAS for your ad campaign. The following steps can help.

A first step in improving RoAS is to weigh carefully your selection of ad channel. For example, if your ideal audience is on Facebook, advertising on LinkedIn might be hurting your RoAS. In such a situation, switching your ad campaign to Facebook might be the surest way to improve RoAS.

If you have been advertising primarily on a single ad platform, it’s good practice to test additional platforms to see if they will result in a higher RoAS. Many e-commerce entrepreneurs find success with Google Ads or Facebook Ads but stop testing other ad platforms altogether. This can limit the success of your ad campaigns. A wide world of channels exists, including LinkedIn, Quora, Reddit, Bing, and others.

Another important lever for improving RoAS is your ad targeting. By targeting your ad audience more finely for the keywords or demographics that convert best for your offer, you can often raise your RoAS. There’s a fine line here too. Targeting too broadly can lower your RoAS to unprofitable levels. On the other hand, targeting too narrowly can limit your upside.

Consider ways to increase your average order value as this, too, can increase the revenue from your ad campaigns. For example, you could implement upsells and cross-sells for buyers coming from ad campaigns. With the resulting boost in revenue from ad campaigns, your RoAS will go up.

Consider other conversion rate optimization tactics, such as improving ad copy, A/B testing and UX optimization, as these can improve your RoAS as well. A sneaky, but rather common, practice, is to use analytics tools like SpyFu to spot the campaigns your competitors have been running so you can “learn” from them.

Optimizing E-Commerce RoAS

In conclusion, Return on Ad Spend is a metric that helps you stay on top of your ad campaigns. It shows you how effective your ad campaigns are, from a financial perspective. The higher your RoAS, the more room you have to meet your advertising and marketing goals. It’s always important, however, to put this important e-commerce metric in the context of your business and other metrics such as customer lifetime value (LTV).

Below we will move into RoAS optimization strategy specifically focused on Google Ads. We mean to provide some detailed RoAS optimization technics, only as examples, to help you to shape your own thinking and strategy for an RoAS uptake strategy that work for your business. You should also tailor your game-plan according to specific ads platform, as the ads game for Facebook, Linkedin, Instagram, Quora and others are very different.  

Optimizing E-Commerce RoAS using Google Ads

Before strategizing on our Google Ads Account, you might want to take a step back and ask: what is the ideal RoAS for my business using Google Ads?

A lot of benchmarks are suggesting around 400%, but well, to be honest, there is no exact formula that can come up with that number. Even further, there are large misconceptions about maximizing the RoAS target: ’The higher your RoAS, the better’ is not always right. As a high RoAS always comes with a trade-off in volume it won’t be possible to achieve high conversions or sales volume at the same time. Also, always keep in mind that RoAS does not take the cost of goods sold into account as well and therefore a good RoAS does not always mean that you’re necessarily making a profit.

So one approach here would be aiming to keep your costs down which comes down to lower cost per click (CPC) when looking at the ads account, but here comes another problem. Keeping your CPC down will result in lower impressions, clicks and therefore conversion which are missed opportunities overall in terms of fewer sales.

In opposite, if you now go and maximize for the impressions, clicks, and conversion or in other words CPC you will have to be willing to spend more on each click due to higher bidding and hence increase your cost again.

So, what’s the overall idea here? The right balance is the key. You need to keep testing until you find the right mix for maximizing your profits.

Here are 5 tactics (+ 1 bonus one) that we use to maximize the most profit out of the Google Search & Shopping campaigns which are usually showing the highest ROI for e-Commerce users :

Prioritize your budget: 

Bid more aggressively on the bestselling products that you can identify by digging deeper into your Google Ads, Analytics, or e-commerce accounts.

Keep on adding negative keywords: 

Have a look at your search query report and identify those phrases and keywords that are not converting, but spending your money. Go ahead and add them to your negative keyword list which will prevent them from appearing.

Keep an eye on your Quality Score (QS): 

The QS contains out of three parts: 1) Click-through rate (CTR) 2) expected CTR and landing page design -> At WunderAds we make sure with our whole funnel approach that we constantly optimize not only the targeting but all the way until the customer hits the purchase button

Be mobile-friendly and speed optimized: 

we look at many different e-commerce stores and to our surprise, many stores still have bad very loading times! On average for every second that your site loads slower, your site will lose about 7% of its conversions!  Google’s PageSpeed Insights is a great tool that helps to analyze single landing pages on your website. And yes, by now there is no more way around having a site that is not responsive.

Optimize your Shopping Feed on a regular basis: 

This is a vital part when running Shopping Campaigns. Make sure that your title and product information is compelling

Bonus Tip – Enable Dynamic Retargeting to boost your RoAS for Google Shopping campaigns: 

This feature will show automatically ads to people who visited your site but didn’t go further to purchase the product. This is a great way to get those visitors back and make them check out the product.

WunderAds – Google Ads Agency

At WunderAds we help e-commerce businesses increase sales by getting you high-quality site visitors and increasing the rate at which those visitors buy your products. We do so by using a data-driven and customer-centric approach focusing on all 4 e-commerce growth levers: traffic, conversion rate, purchase frequency, and average order value. So far, we’ve helped our clients to grow their stores from 25% of all 125%.

If you think that would be interesting to you, let’s have a chat on how we can help you!

ABEL Finance

Pondering how much you could or should spend on your ad campaigns? Struggling to understand the return you are getting on your campaigns? ABEL Finance can help to get you back in control of your finances and avoid wasting money on unprofitable channels or campaigns.

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