ROAS, return on ad spend, is a popular measure in the digital marketing world. In this article, I'll go through what it is and why it's so important for optimizing the growth of your business.
ROAS is an important key figure for e-commerce, B2B, and SaaS businesses who wish to measure their profitability when you advertise on platforms such as Google and Facebook. Very often than not, I get questions such as: "We have 450% in ROAS, is that good?". Before I answer that, we'll start with outlining the term we all know and love.
The term stands for return on advertising spend/return on ad spend. And we calculate this by taking your sales values divided by the cost of advertising. Say you advertise for 120 000 USD on Google Ads and your sales from this was 560 000 USD (no tax included). Then our return on adspend is 409 % (360 000 USD / 88 000 USD). Don't mix up ROAS with its close resembling "cousin" ROI.
Return on ad spend and Return on investment are not the same things, even if they are very similar. ROI (return on investment) is a much more popular term outside the world of digital marketing. The difference between these two is simple. ROI is calculated as advertising sales minus the cost of advertising, divided by the cost of advertising. With the same example as above ROI becomes 309% (($360 000 USD - $88 000)/$88 000).
You can say ROAS is better than ROI, or on the contrary, it's just two variants that more or less does the same thing. But since most advertising platforms usually use return on adspend, it's the most practical key measurement for e-commerce, b2b, and SaaS businesses when analyzing their advertising campaigns. The most important thing is not to mix ROAS and ROI.
ACOS, advertising cost of sale, is yet another "cousin" to return on adspend. This measurement is often used very diligently by Amazon. ACOS measures the same thing as ROAS but reversed (the numerator and denominator change places). Lets us the same example above, and ACOS becomes 24,4% (88 000 / 360 000).
So if we return to the original question, what is a good ROAS? It's a little bit like answering how long a thread is, at least if you're going to answer with a number that generally can be applied to all businesses.
The answer is a ROAS that fulfills the goal with your advertising. Let us take some examples: If you have 50 % in gross margin on the software or service you're selling. You are happy with the advertising only covering your direct costs for the product, and you want to maximize your growth - then 200% is a great ROAS.
Here is the logic that if you advertise for $100 000, then a 200% ROAS gives you $200 000 in sales. From that result, $100 000 ($200 000 * 50 % gross margin) covers the cost of the service or product and $100 000 to cover the cost of advertising.
If you'd rather like the advertising to cover all your costs and you have a net margin of 20% then 500% is the answer for what ROAs is good for you. So what a great ROAS comes down to are your goals and prerequisites.
A high ROAS is, as you now know when you get close to your goal with advertising. If you succeed with a ROAS that is a lot higher than your goal, it can at first eyesight seem brilliant. But a ROAS that is higher than your goal most likely means you will lose potential growth. With a ROAS that lies closer to your goal, you could buy more traffic. Leading to more conversions and leads being generated for your business.
And in the same way, ROAS that is much lower than your goal is lost potential for conversions and leads. So make sure you aim to reach as close to your goal as possible.
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For B2B, SaaS, and eCommerce businesses, it's advantageous to use multiple ROAS-goals. Why? Because the prerequisites are rarely identical for all your services or products. Some services and products have very different margins, and if you choose to use an average ROAS for your whole service/product catalog, there is a good chance you'll buy too much traffic where you have lower margins and too little traffic where your margins are higher.
Suppose you want to delve deeper into how you can succeed as an Ecommerce, B2B, or SaaS company. You should take a look at The 6 best SaaS tools for 2021.
Do you need help with analyzing a good ROAS for you? Contact us at LunarStrategy - we'd love to help you! Free of charge, of course