ROAS refers to your return on ad spend. It is most commonly referred to as your metric of profitability on ecommerce it measures how much return you got from your PPC ads – be it on facebook, google or snapchat ads.
Why should you read this article?
- Learn why you must understand the concept of ROAS
- How to calculate your breakeven ROAS if you have fulfillment cost in ecommerce
- How to set up and track your ROAS on facebook ads
- How to set up and track your ROAS on google ads
- The difference between your entire business growth and ROI and marketing focused ROAS metric
The Concept Of ROAS
ROAS is a very rudimentary number to measure your return on your advertising dollar. It is very simple to understand, it determines how much money or revenue is being generated for every dollar ($1) being put into advertising.
For example if I had a 2x ROAS, it would mean.
If I spend $1 on facebook ads, I would have generated $2 in revenue.
If I spend $100,000 on facebook ads, I would have generated $200,000 in revenue.
This metric is super important to understand because facebook and google eat up your money very fast when you go into paid traffic and the ROAS is usually an indicator whether you’re making a lot of profit or going into the red.
How to calculate your break even ROAS
For a physical product e-commerce store, there is such a thing as the breakeven ROAS because besides the marketing spend, you still have to pay for the cost of fulfilling the product (unlike a digital product).
It is important to know before running any advertising what your break even ROAS numbers are so that if you dip below that level, you know that you are losing money on your advertising and need to fix something.
For example, take your product price to be $100. Take the cost of the product to be $30. This means your gross profit margin stands at $70.
The formula to calculate your breakeven ROAS is:
Breakeven ROAS = Product price/profit margin
Breakeven ROAS = $100/$70 = 1.42
If your ROAS dips below 1.42, you are losing money and its a signal for you to change and FIX something!
If your ROAS is above 1.42, you are profitable, scale that campaign up!
It is also important to note that your ROAS also decreases as your budget increases. This is because at scale, there is a lower probability that your messaging/copywriting/ad creative will resonate with the target audience.
That is why it is best to be able to be >2x ROAS on your cold traffic campaigns before you are able to scale the budget up. You don’t want to be scaling up then finding yourself in the unprofitable category again.
How to setup and measure ROAS on facebook ads
First, log into your facebook business manager and head over to the ads manager section. Afterwards, on the right side of your dashboard, columns: Performance > press customise the dropdown menu then press customise columns.
A popup will appear in the middle of the screen. You will be presented with an option to search for metrics that you want to see in your dashboard. Type in the words ‘Purchase ROAS’ and select ‘Total’. Afterwards, head down to the blue button on your bottom right and click apply.
The ROAS metric should be loaded into your dashboard. Scroll to the right side of your dashboard and see the ROAS metric. If you change the date range on your dashboard, the metrics will change accordingly.
How to setup and measure ROAS on google ads
Go to your google ads dashboard and enter one of your campaigns so you can see the dashboard. On the right hand side, click on columns > Modify columns. At the top, search for the metric called ‘conversion value/cost’.
If you want to rename that value as ROAS instead of conversion value/cost, you can press customize columns again and choose the custom columns section. Create a new custom column and just put the conversion value divided by cost as the parameters of the metric.
Difference between ROAS and entire business growth
Although ROAS is a very important metric for online businesses, the metric alone will not tell you the entire picture of the business because you have not factored in deducting your employee expense, the software costs, accounting and legal compliance costs monthly to run your business.
ROI of the business = Revenue / (Product costs + employee expense + marketing spend + legal costs + software costs)
Whereas ROAS is a purely digital marketing focused metric:
ROAS = Revenue / Total marketing spend
Although you run an online business, keep in mind these calculations whenever you’re doing your accounting.