RoAS- Return on Ad Spend
As the Amazon marketplace becomes increasingly competitive, it is nearly impossible for sellers to stand out and break through the clutter without investing ad dollars. Amazon advertising is a great tool to help sellers grow awareness of their brand and reach shoppers searching for products like theirs.
But once you take the leap and choose to invest in advertising, how should you measure your success? This is a question that advertisers everywhere are asking themselves, both on and off Amazon. And for good reason. Without a key metric against which to measure success, you will never know whether or not your campaign is working and if your dollars are being spent effectively. This is where 'Return on Ad Spend' comes in.
It is important for your entire team to align on the same metric(s). If you are measuring success by Return on Ad Spend (RoAS), for example, but your partner is measuring by sales, it could be almost impossible for the two of you to compare and optimize results seamlessly. Without a single metric, it is easy to get out of sync and get confused by differing data that muddles your advertising insights.
So, What Metrics Should I Be Using?
Campaign Manager provides advertisers with a range of reporting data and ad metrics that can be used to analyze your ad spend and help you understand your return on investment (ROI). These include:
- Budget: the average amount you are willing to spend on your campaign per day (for sponsored product ads), or the maximum amount per day or campaign (for sponsored brands)
- Spend: the amount you have spent on ad clicks
- Sales: the total product sales generated from ad clicks (for sponsored product ads), or all purchases for your brand's products made by shoppers who clicked on your ad (for sponsored brands)
- Advertising cost of sales (ACoS): the percentage of sales spent on advertising. ACoS = total spend ÷ total sales x 100
- Return on advertising spend (RoAS): the opposite of ACoS, or total sales divided by total spend
You can view each of these metrics within your Amazon account by going to Advertising > Campaign Manager for an overview of your campaigns.
With so much available data, advertisers often wonder which metrics they should focus on. Each metric has its own merits and purpose, but, by far, the single most important metric for measuring the effectiveness of your campaign is RoAS.
What Exactly is RoAS?
As we mentioned above, RoAS is a measure of your total sales divided by your total spend. Put simply, RoAS answers the question, “If I spend X dollars on advertising, what will I get back?”
In this way, RoAS is closely associated with your ROI. While ROI is often used to evaluate the overall effectiveness of your marketing, RoAS is used on a more granular level to assess the effectiveness of a specific campaign, ad or even keyword.
RoAS is an incredibly flexible metric – which is one of the reasons it is so valuable to advertisers. You can use your RoAS to assess the impact of a specific ad set, targeting change and more.
How Does Amazon Calculate RoAS?
One of the nice things about RoAS is that it is a pretty simple metric to calculate. While there are a few different ways to express RoAS, Amazon represents RoAS as an index (multiplier) rather than a percentage.
ROAS = Revenue / Spend
So, if you spend $2,000 and earn $10,000 in revenue, your RoAS would be 5. This essentially means that for every $5 you are making in revenue, you are spending $1 on advertising. An interesting thing to note is that unlike many other metrics, a higher RoAS is actually indicative of better performance.
One thing you might notice is that RoAS is the exact inverse of ACoS, meaning that RoAS = 1/ACoS. While RoAs is expressed as an index, ACoS is represented as a percentage. The beauty in this relationship is that if you have your RoAS or ACoS, you can always use that number to calculate the corresponding metric.
For example, if your RoAS is 5, your ACoS is 20% and vice versa. Know your return on spend, and you can calculate your advertising costs. Know your costs, and you can calculate your return. There is a nice back and forth between the two metrics that you can use to assess the overall effectiveness of your campaign.
Right now, you can view your RoAS through downloadable reports.
So, Why Should I Use RoAS?
Right about now, you might be wondering what makes RoAS so special. Can’t I just use my conversion rate, click-through rate or other more familiar metrics to measure success?
Well, yes, you could, but it might not be the most meaningful indicator of the effectiveness of your campaign. You can drive traffic, or even conversions, but these metrics are not a direct measurement of your revenue.
The best way to see how your ads are actually making you money is to compare your revenue to your spending. If your ads are not resulting in revenue, you will know that something needs to change. Without RoAS, you would never get this information.
What is a Good RoAS?
Up until this point, we have covered off on what RoAS is, how it is calculated and why it is important to your business. But now, this leads us to another question: how will I know if my RoAS is good? All this information is great, but if you do not know how to assess the metric, it is of no use to you.
The answer to this question really varies from business to business, and ultimately depends on your product’s profit margins. To see why, let’s look at a short example.
Let’s pretend that you are a business that sells shampoo on Amazon. Each bottle of shampoo goes for $15, and you sell about 20 bottles a month. This puts you at $300 a month before you consider expenses.
It costs you about $7.50 to produce and package your shampoo, leaving you with $150 in monthly profit. These costs are variable, meaning they are dependant on how much product you sell. But you also have fixed costs – aka those that you have to pay regardless of the sales you make. Right now your fixed costs are $200 a month, putting you at a $50 deficit.
To help make up the difference, you decide to run some Amazon PPC ads. But what sort of return, or RoAS, do you need to make the investment worth it?
- 1:1 RoAS: If your revenue is equal to your ad spend, it might seem like you are breaking even, but you are not making up for any of your variable or fixed costs, let alone your $50 deficit.
- 2:1 RoAS: If you spend $7.50 a month on advertising to make a $15 sale, you will make up for your variable costs, but still have yet to cover your fixed costs or your current deficit.
If we were to continue with this example, your shampoo company would start making significant profits at around 5:1 RoAS. For other businesses, a 10:1 RoAS might be necessary to remain profitable. At the end of the day, the larger your profit margins, the lower RoAS you can afford. If your profit margins are slim, you need low ad costs to help you get a higher return on your investment.
You can start to see that breaking even, or even making a small profit on your advertising, is not enough to justify your marketing efforts. You need to be much more efficient to make up for your variable and fixed costs, as well as any debts you might be incurring.
What About TACoS?
An even newer term you might have heard tossed around lately is TACoS, or total advertising cost of sale.
TACoS = Ad Spend / Total Sales
As you can see, this is similar to the ACoS formula. The difference being that instead of comparing your ad spend to just your advertising revenue, you are comparing it to your sales as a whole.
This is an important distinction, as TACoS gives context to your entire business, not just your advertising efforts. If you think about your business, the goal of advertising is not merely to make sales through your ads, but for your ads to drive your organic traffic and eventually lead people to search for your product directly.
If this is your advertising aim, TACoS is really what you care about. It speaks to whether or not your advertising is creating the flywheel effect and building your brand to help achieve organic sales growth. RoAS will tell you how effective your ads are at driving ad sales. But TACoS will tell you how well your conversions lead to organic sales.
How Do I Interpret TACoS?
If you look at your ACoS and TACoS side-by-side, the last thing you want to see is your ACoS going down as your TACoS is going up. While this might seem like cause to celebrate, this is actually telling you that your ad spend is having a bigger and bigger impact on your total revenue, which is not what you want. What you really want is for your TACoS to stay flat or start to fall. If your ACoS is falling, your TACoS should fall at the same rate, at least.
A Warning About TACoS
Sounds good, doesn’t it? You might even be thinking, why are we talking so much about RoAS when TACoS seems like a better metric to track. Well, the issue with TACoS comes in actually measuring the data. While RoAS is readily available through Campaign Manager, TACoS forces you to take your advertising data and your sales data, and merge them together at the product level. There are a lot of nuances in interpreting this data and doing so correctly. Until it becomes easier to collect the data and attribute it properly, RoAS will continue to reign supreme.
Currently, RoAS is the most useful metric for determining how well your ads are driving new revenue. TACoS is certainly on the rise, but the complexities of calculation make it unrealistic for most sellers to use effectively right now.