Is your ROAS cold as ice or flaming hot?
In the past year, the evolution of e-commerce has accelerated due to the world-wide pandemic and the adoption of online shopping trends. With the shift, we must be able to accurately quantify our paid media returns to set benchmarks for present and future post-covid earnings.
To all the fanatical hangers-on of ROAS and advertisers who do not have a line of sight of profit margins and company financials, your best bet would be to aim for a ROAS percentile that is 1,200%+.
See the below guidelines to follow for future benchmarking:
- Cold as Ice: 0-399% ROAS: In this range, most eCommerce companies are seeing a loss.
- Lukewarm: 400-799% ROAS: The company is either breaking even or beginning to see a profit.
- Hot Hot Hot: 800%+, the company should be making a good profit. But to ultimately be safe, aim for the 1,200%+ zone.
Return On Ad Spend has been for years, the best way in which to measure and assess the effectiveness of your paid advertising efforts. Advertisers have found comfort in relying on ROAS (revenue divided by ad spend/cost) results to measure the effectiveness of their ads. ROAS has and continues to be a useful metric when analysing how conversions have directly contributed to top-line revenue, online sales and by measuring new customers through the use of upper-funnel strategies. However, your business may be at risk of losing out on profits if ROAS is your primary KPI, and the reason is quite apparent. Return On Ad Spend doesn’t give advertisers the full financial picture of the effectiveness of the ads. Most importantly, we do not see how a conversion impacts the bottom line of the business or the brand.
Let’s take a few steps back and look at how ROAS materialised and why it became a golden number. When e-Commerce tech companies such as Amazon introduced self-service advertising; sales teams looked to the marketing team to cover the incremental digital marketing costs. As marketers, we continuously rationalise the work we do based on how the data relates to the organisation’s ROI. Therefore, justifying your advertising spend undoubtedly became a priority as marketers took on the beast of running paid search and sponsored products on various marketplaces such as Walmart and Amazon.
If you are solely relying on ROAS (Return On Ad Spend) to measure ad performance, your brand could be at risk. Watch out for these 3 indicators that may be lying to you.
1. Your daily success could potentially be skewed.
For example, you are weighting your budget towards Product Set A, and you are meeting your ROAS goals. But the money you are allocating towards Product Set B appears not to be performing as well. However, when looking at the success of Product Set B over the long term, it could be much higher due to heavier product margins. It is essential in this case for real-time reports to be monitored, assessed, and optimisations.
2. ROAS caps your ad spend.
In short, algorithms learn to optimise to the objective that you have set. Meaning you are only bidding towards this objective which is limiting your sales potential. Many recent studies and trend predictions have talk about how consumer behaviour is not linear and that it requires not only an omni-channel strategy but an Always-On approach.
‘Square’s survey of over 1,100 surveyed business owners revealed that only 40% sell on social media and 16% on Amazon — so clearly much more can be done to get in front of the omni-browsing customer.’ (BIGCOMMERCE).
Keeping this in mind, you don’t want to lose out on sales opportunities. For example, some strategies may include a daily fixed budget, and once you have reached your daily bids and impressions, the platform stops spending. Facebook’s lifetime budget allows you to spend the entire run-time of your campaign or ad set. This gives your campaign the flexibility to capture the night owl or early worm shoppers.
3. ROAS says you are making money, but are you?
You may be hitting the 400% return that you benchmarked but have you considered all the company costs and made sure that this percentile is making a profit? As profit margins vary from industry to industry, company to company, brand to brand and product to product, it is essential to safeguard potential losses. You may be in danger if you are in the 0 – 399% range. For example, ‘Say your company is seeing a ROAS of 300% on your AdWords campaigns. This means that for R1 spent in AdWords, you received R3 in revenue. That leaves you with R2. If the product costs you R1, and your profit is 50% of that product, you are down to .50. But you also have to pay for the agency and/or employee fees, and any other business overhead expenses. Also, in Google Analytics revenue, includes shipping. Can your business cover all of that with .50 per product? Probably not. And what if the product costs you R2 or more? In this instance, you will need a much higher ROAS to make a profit.’ – (Classy Llama 2017).
At the end of the rat race, the only thing that matters is the businesses bottom line – the profits. Taking a short-term observation approach can limit your learnings and ultimately, your earnings.