Stuart Henderson once said, “Doing business without advertising is like winking at a girl in the dark. You know what you are doing but nobody else does.” John Wanamaker added, “Half the money I spend on advertising is wasted; the trouble is I don't know which half”. So, anyone who does business online should not only advertise their products and services but also look carefully at the promotional campaigns they are running. This is the only way we can verify the effectiveness of our actions. Fortunately, ROAS, an indicator for estimating profits from advertising campaigns, comes in handy. Is it sufficient to measure the efficacy?
ROAS in e-commerce – what is it?
ROAS (Return on Ad Spend) is an indicator used to estimate profits generated by advertising campaigns. It allows you to calculate the return on advertising expenditure. ROAS is calculated according to the following formula:
ROAS = (advertising campaign revenue) / (advertising campaign cost)
If we spend EUR 100 on a promotional campaign and sell products for EUR 1000, ROAS will be 10. Is this a good result? Definitely yes. With such values, it turns out that the advertisement allowed us to achieve ten times more revenue than the costs incurred for the advertising campaign.
What is essential, is that the ROAS calculated in this way can be related to the expenses incurred for:
- advertising in a specific channel,
- advertising in a particular campaign,
- individual advertising groups,
- exact keywords.
Is ROAS sufficient to measure the effectiveness of promotional campaigns?
ROAS is necessary to quantify the effectiveness of advertising campaigns and how they contribute to the results of an online shop. However, to have an in-depth picture of the situation, it is worth comparing it with the CLV (Customer Lifetime Value) indicator. This gives us a better view of future budgets, strategies and general marketing developments of our online shop. We must remember that the detailed analysis should primarily depend on the purpose of the campaign. The ROAS indicator is also influenced by the company's overheads, operating costs, margin and the condition of an online shop. Additionally, we must not forget that the costs of preparing an advertisement do not end with their publication alone. If we want to calculate the effectiveness of promotional activities reliably, we should also take the following factors into account:
Advertising campaign costs – usually, to handle promotional activities in an online shop, it is necessary to create an additional workstation. This may be an internal employee or a subcontractor acting on our behalf. Accurate accounting for internal expenses, such as salary and other related costs, should be included in the ROAS analysis. If these factors are not quantified precisely, ROAS will not explain the effectiveness of individual marketing activities, and their usefulness in the calculation will decrease.
Use of affiliate programmes – network transaction fees and percentage commissions paid to partner networks should also be included in the ROAS analysis.
PPC, CPC advertising settlements – data such as average cost per click, the total number of clicks, the average cost per thousand views or the number of actually purchased views should also be taken into account when calculating ROAS.
What level of ROAS is right in e-commerce?
According to Nielsen's statistics, the average ROAS for all industries is around USD 2.87. However, it is assumed that ROAS at 4x or 400% should be satisfactory. This means that when we generate EUR 4 for every EUR 1 spent on advertising, we increase the chance that the advertisements will bring profit.
Of course, we cannot generalise. If our online shop is starting to operate and the range offered is a niche, then in the first stage, we must first of all, focus on educating our customers, without waiting for conversions. Then ROAS from a 1x or 2x campaign should satisfy us. Only after increasing brand recognition we can move on to the next stage of the marketing plan and drive real sales. Then it is worth working on achieving higher results.
What can you do to increase the ROAS value?
Please note that ROAS consists of two elements – advertising revenue and expenditure. So, if we want to increase ROAS, we can either increase the revenue generated by published advertising or we can reduce advertising costs.
How to do this? First of all, you need to take care of the content of your advertisements and match your messages with the target group. Much also depends on choosing the right keywords for the promotional campaign, which must not only be friendly to search engine robots but also to e-shop customers. It is also worth taking care of the service's UX, the loading speed and adjustment to mobile devices. A/B tests and constant monitoring of campaign results will also be helpful in increasing ROAS. In this way, we can check exactly which channels and ad formats are effective and better optimise the budget.
By carefully monitoring ROAS, e-commerce companies can make informed decisions about where to invest their advertising money and how they can become more effective. This indicator provides critical data at every stage of company development. It is possible to achieve high ROAS. Still, at the same time, it should be remembered that ROAS will fluctuate depending on seasonality, margin levels, operating costs and what the competition is doing.