Updated: Jan 11
If you are a business owner or an e-commerce store owner, you’ve probably heard the terms ROAS and ROI when talking about advertising optimization. But these are not mere “terms” or jargons. They are the keys to unlock a goldmine of advertising opportunities for your brand. They are the most important eCommerce KPIs & metrics which you should track.
Let’s start by understanding these terms and see how they really fit into your business. Technically, ROAS or Return on Advertising Spend and ROI are deeply interlinked.
ROAS or Return on Advertising Spend is a vital eCommerce metric that is used to gauge how effective your online advertising is in terms of generating sales.
So if you own a saree brand and you are running an ad campaign for Women’s Day, ROAS will be crucial to understand how well your campaign did. It is defined as the ratio of the revenue generated by advertising over the cost of that advertising.
Here’s how to calculate ROAS:
Consider this example. Say your ecommerce saree store spends INR 2,000 per month on Display ads for your women’s day campaign. All the people who click on this ad and come to your website are buying sarees worth INR 8,000 per month. The ROAS for your Display ads then, is INR 8,000 / INR 2,000 = 4.00.
Now imagine you are also spending INR 4,000 per month on PPC campaigns. The customers clicking through those are making purchases amounting to INR 12,000 each month. The ROAS from PPC advertising is INR 12,000 / INR 4,000 = 3.00.
So, your Display ads are returning INR 4 in revenue for every INR 1 spent, while the return on your PPC ad campaign is INR 3 for every INR 1 spend on ads. Clearly, there is a better return on Display ad spending as compared to PPC. The metrics suggest that you should ideally move some of your budget from PPC to Display ads either in this campaign as it runs, or your next one, to get maximum return on your money.
When you need to check how much of your advertising spend you got back in revenue, it’s ROAS that measures it for you.
ROAS is sometimes confused with Return on Investment (ROI). But if you dive deeper, it is in fact different. ROI looks at profit only rather than entire revenue. The formula for ROI is:
Factors like cost of cloth, tailors, warehouse for your saree eCommerce business or lack of profit margin can impact your ROI. ROAS looks only at the cost of an ad campaign, ad group, ad or even keywords while ROI counts the overall investment and revenue.
To identify if your advertising is delivering the ‘bang for your buck,’ apply ROAS. This is the metric to turn to when you need to plan where to invest your advertising money.
ROAS in comparison is simpler to calculate than ROI and is the go-to default metric used by direct-to-consumer brands concerned with optimizing advertising spends. For your same business, if you were to calculate the ROI from the Display ads, you would need to know the profit.
Profit = Revenue from Ads-Cost of Ads-Cost of Goods Sold-Allocated Operating Costs
Some of these figures require inputs from accounting departments as well as detailed tracking of which goods were sold by ads etc.
For most businesses, it is not possible to compute a profit to the sales occurring from a specific ad campaign. Often even if a business has access to this data, it is a time consuming process.
Why are these eCommerce metrics important?
Marketing metrics like ROI and ROAS offer methods to evaluate what is working in terms of advertising efforts and how they can be improved. A word of caution - improper analysis of your eCommerce shop’s metrics could lead to a loss of money and clients.
ROI provides an outlook that is often too broad. ROAS provides insights into the bigger picture by not only showing what’s leading to conversions but also how much revenue the conversion actions are generating. Trusted and proven ecommerce platforms like Shoptimize are always acutely aware that ensuring good direct-to-consumer margins for clients, needs them to look at the bigger picture. ROAS tracking along with all the other numbers gives store owners the ability to make decisions based on information specific to ad spend.
What is the ideal ROAS to ensure good direct-to-consumer margins?
The industry benchmark for ROAS can be above 4.00 which means that for every INR 100 spent on ads, your revenue is INR 400. However, there’s no one correct or perfect figure. It might change as per your AOV, category and how well your campaigns are optimized.
Accurate ROAS information is crucial for eCommerce companies to know their ad value and where to best invest their ad budgets. Listing fees are just the most obvious costs incurred when it comes to digital advertising. An advertising campaign includes other costs such as:
Vendor or partner fees and commissions.
Affiliate commission and the network transaction fees.
Other metrics like average cost per click, total number of clicks, cost per 1000 impressions and number of impressions bought.
Plenty of eCommerce businesses erroneously assume that ROAS is too complicated. However, if you ignore ROAS you will miss out on data related to paid campaigns. While traffic and clicks are important, the bottom line is revenue and ROAS measures only revenue.
You’d be right to wonder whether there are any classic rookie mistakes to look out for while measuring ROAS because there are a few. Let’s imagine you have at an eCommerce store selling organic deodorants. The business had ads running simultaneously on Facebook and Google that were throwing up high numbers on conversion rates. Sadly the initial thrill was short-lived as you noticed that the conversion reports showed duplications of the same order. Naturally, the ROI and ROAS were inaccurate. With a robust platform like Shoptimize, you can access an Orders report that matches conversions on Facebook and Google with eCommerce store order identification numbers. Additionally you may realize that since ROAS measures only ad spend, it cannot be used as a primary KPI.
Always aim for maximum ROAS
Initially, calculating ROAS may seem complicated but once you understand what metrics your business requires, you’ll appreciate knowing exactly how your advertising is performing.
As a competitive player in the eCommerce segment, you want your revenue to increase while your ad spend stays the same. It’s not difficult to get an accurate ROAS.
All you need to do is review the metrics and take into consideration costs only related to advertising. For example, this will include copywriting and designing fees but definitely not infrastructure overheads. Experts like Shoptimize go a step further to check that you are using the most suitable Google Ads attribution model for your online store.
You can also improve ROAS if you reduce the amount spent on ads. To do this, focus on these three areas: Time spent on Ad Management, Negative Keywords, and Quality Score.
If you are using an ad management company think about whether you can actually have your own people handle the task. Or if you are already managing ads in-house but it’s too time consuming, outsource the job. Did you know that an average Google Ads account wastes almost 76% of its budget on incorrect keywords?4 Get on the job to review and remove terms that are not relevant and can waste your ad spend. Lastly, keep a track of your Google Quality Score. This tells you if an ad is relevant for the targeted keywords. Better Quality Score leads to a higher rank for your ad and that means better revenue for your business.
When used along with other metrics, ROAS is a powerful tool. For example, assume you own an eCommerce site and run a Google Shopping campaign for running shoes. To check if the shopping ad you created is working you might look at product groups page, product page, dimensions page, auction insights report, and bid simulators. You find that you have low ROAS but high conversion for the xyz product page. The low ROAS signals the fact that the campaign is not effective and you need to bring the ad cost down. The high conversion signals that the pricing may be too low or wrong key terms are aligned with the bid strategy. The high conversion is definitely a good thing, but it should be accompanied by a low ad cost. ROAS therefore is the metric that shows not just your return on ad spend but context too.
An eCommerce platform like Shoptimize can easily track ROAS and ROI across all ad platforms. Purchases can be tracked as conversions and then the amount of money produced by the campaign, ad group, ad or keyword can be identified. For direct-to-consumer brands that might find this tricky to implement, platforms like Shoptimize can step in to provide relevant insights and optimizations.