ROAS: When To Use It and When To Lose It

When it comes to digital marketing, every click, hover, scroll, and impression counts. One of the best ways to measure these crucial metrics is by looking at the Return on Advertising Spend, or ROAS. 

ROAS is the marketer’s compass for navigating advertising-campaign performance, guiding these digital leaders through the complexities of online advertising. But what exactly is ROAS, and what makes it so important? In this guide, we will explore the definition of ROAS, its method of calculation, when to use it, and when to lose it.

Photo by Firmbee.com on Unsplash

What is ROAS?

ROAS, or Return on Advertising Spend, is a metric used by marketers to measure the effectiveness of advertising campaigns in generating revenue. Unlike Return on Investment (ROI), which considers all expenses, ROAS specifically focuses specifically on the revenue generated from advertising efforts.

Calculation Methods

ROAS can be calculated using a simple formula:

ROAS = Revenue from Ads / Advertising Costs

For example, if an advertising campaign generates $10,000 in revenue and the total advertising cost is $2,000, the ROAS would be calculated as follows:

Revenue from Ads = $10,000

Advertising costs = $2,000

ROAS= $10,000 / $2,000

ROAS = 5

This indicates that for every $1 spent on advertising, $5 in revenue is generated.

Significance of ROAS

ROAS provides marketers with valuable insights into the efficiency and profitability of their advertising efforts. By understanding the return generated from each dollar spent on advertising, businesses can make informed decisions regarding budget allocation, campaign optimization, and overall marketing strategy.

Photo by Mimi Thian on Unsplash

Importance in Amazon Marketing

ROAS is a crucial metric in digital marketing for several reasons:

1. Financial Efficiency: ROAS measures the revenue generated from advertising compared to the cost of that advertising. It tells you how effectively your advertising dollars are being converted into revenue. Most of the time, maximizing ROAS indicates that you're spending your budget wisely and getting the most out of your marketing investments (with a few caveats, covered below).
   

2. Performance Evaluation: ROAS provides insight into the performance of your advertising campaigns or strategy. By tracking ROAS over time, you can evaluate the effectiveness of different campaigns, channels, and strategies. This allows you to allocate resources to the most profitable campaigns and targeted keywords/products and optimize underperforming ones.
   

3. Optimization: ROAS guides optimization efforts by identifying areas for improvement. If your ROAS is below your strategy target or category benchmark, it indicates that adjustments are needed in your campaigns. This could involve refining targeting, adjusting ad creatives, optimizing landing pages, or reallocating budget to higher-performing campaign strategies.
   

4. Efficiency: Ultimately, the goal of advertising is to drive organic revenue. ROAS measures the cost to acquire a sale, giving you a clear picture of your target or campaign's spend efficiency. This can then be compared against ROAS benchmarks to determine where to further optimize advertising funds to generate new sales. 
   

5. Budget Allocation: Understanding ROAS helps in making informed decisions about budget allocation. By focusing resources on campaigns and targets with higher ROAS, you can maximize revenue and profitability while minimizing wasted spend on less effective channels or campaigns (with a few caveats covered below). 

Can ROAS be Used Alone? 

In short, no. If marketers fail to track other metrics together with ROAS performance, they often make short term decisions that hurt long term marketing objectives that may, ultimately, hinder financial performance.

1. Keyword Advertisements: Some marketers are tempted to focus pay-per-click (PPC) advertising solely on increasing investment into Amazon campaigns and keyword targets with the highest ROAS. If they do this, though, they will fall into a trap: since a brand’s own keywords and own products will typically convert the highest in ad placements, they typically generate the highest ROAS. That is because when a customer searches for a brand’s own keywords and products, they are likely already committed to buying from that brand. When this happens, Amazon attributes the sale to the advertised placement clicked by the customer.But what about the organic sales that would have taken place without this ad? They are now attributed to pay-per-click advertising spend, unintentionally leading the brand to pay for customers they could have gotten for free. By comparing ROAS with other metrics (see TACOS below), brands can find early indications of these trends and make better use of poorly spent advertising dollars.
   

2. New Product Launches: ROAS can indeed be useful for assessing the immediate sales impact of advertising efforts for new product launches on Amazon. It helps gauge how effectively advertising spending translates into revenue generation, providing valuable feedback on the initial success of the launch. However, relying solely on ROAS may not capture the full picture, especially for new product launches where long-term brand building and market penetration are key objectives. In addition to ROAS, it's essential to track metrics such as product impressions, customer engagement, and market share to evaluate the overall effectiveness and potential growth trajectory of the new product on Amazon.

Photo by bruce mars on Unsplash

Alternatives to ROAS

Of course understanding ROAS performance is essential for measuring the effectiveness of Amazon campaigns. However, especially in situations like those mentioned above, it is best to use ROAS in conjunction with other methods of measurement to ensure brands a well rounded picture of their campaigns’ success.

TACOS:

TACOS, or total advertising cost of sales, depicts the advertising investment as a percentage of total sales. 

TACOS is calculated using this simple formula:

TACOS = (Total Ad Spend / Total Sales) X 100

For example, a business allocates $100 towards advertising, resulting in $350 in sales directly attributed to those ads, within a total sales context of $600. This computation yields a ROAS of 3.5 and a Total Advertising Cost of Sales (TACOS) ratio of 16.7% ($100 divided by $600). 

Total Ad Spend = $100

Total Sales = $600

Revenue from Ads = $350

TACOS = (100/600) X 100

TACOS = 16.7%

ROAS = $350/$100

ROAS = 3.5

As seen here, while ROAS offers precision by gauging the return generated from advertising expenditure, TACOS provides a broader perspective. It doesn't merely focus on profitability; rather, it delves into whether advertising efforts not only drive sales but also foster organic growth – those elusive sales not directly linked to advertising. In essence, ROAS and TACOS serve as complementary tools, offering a nuanced understanding of advertising effectiveness and its comprehensive impact on business growth.

Ad Sales Percentage:

Ad Sales percentage (%) typically refers to the percentage of total sales that can be attributed directly to advertising efforts. Like TACOS, this metric considers total sales and helps track the growth of organic sales. If advertising spend is increasing with time and Ad Sales % is relatively steady or decreasing, this can indicate organic sales growth.

Putting It All Together

In addition to monitoring TACOS, it is important to establish clear targets and budgets for ROAS based on different strategies, product categories, or types of advertisements. 

For example, a brand may choose to set a high ROAS target and low budget for defending their own branded search terms and set a lower ROAS target and higher budget for category or competitor search terms. Tracking distinct targets in this way can help marketers remain disciplined in adequately defending their own branded searches while investing in acquiring market share from competitors (where ROAS is expected to be lower). By improving the ROAS performance within each parameter over time, marketers can achieve improved efficiency and maximize customer growth.

Photo by krakenimages on Unsplash

Conclusion

ROAS serves as a critical metric for measuring the effectiveness and efficiency of advertising campaigns on Amazon. By calculating the return generated from advertising spend, marketers can make informed decisions, optimize campaign performance, and drive and refine their costs of customer acquisition and re-engagement, in turn unlocking the full potential of their advertising effort. 

If you’re looking for a way to use ROAS, TACOS, and advertising investments to achieve sustainable growth in today’s competitive Amazon landscape, reach out to the TripleLine team here.