What is ROAS?
ROAS stands for Return on Ad Spend. This is a very important metric to determine the success of a social media campaign. To further explain the concept of ROAS, lets imagine a campaign for a company that sells clothes. They are trying to sell blue jeans for $100 per pair. Their target ROAS for this campaign is a 5x. This means that for every $1 of ad spend, they want to receive $5 in sales. Say that they sell 10 pairs of jeans, and take in a total of $1000. They spent $100 total on the ad spend for social media. To figure out the ROAS for this situation, this simple formula can be used: Total Sales/Total Ad Spend=ROAS. The formula for this situation would look like this: $1000/$100=10. The 10 means a ROAS of 10x, or the company received $10 for every $1 in advertising spend. The company dramatically exceeded its goal of 5x! Which means that the jeans that they sold were even more profitable than they expected.
Chart represents the different levels of revenue at the corresponding ROAS. Based on the example above.
What types of Campaigns use ROAS?
There are a lot of different campaigns that are utilized on social media. They can be simplified into 3 categories: Awareness, Consideration, and Conversion. Each campaign has different metrics that are used to determine success. Awareness and Consideration do not utilize ROAS as a relevant measurement, because the inherent goal of these campaigns is not to directly get sales. Those 2 campaigns seek to increase product awareness and nurture potential consumers. Effectively doing this helps guide consumers through the purchase process and increases the chances of them converting into a sale.
ROAS is the main metric used in the Conversion type of campaign. This is the stage in the buying process where consumers have been made aware of the product and are potentially ready to purchase. Conversion campaigns are more direct and specifically encourage consumers to make the purchase. Most advertisers consider a 3x ROAS as benchmark to compare campaigns to. ROAS varies wildly by industry, and can range anywhere from 3x-30x or even higher.
Where should my ROAS Target Be Set?
For this question, lets again consider the clothing company selling jeans at $100 per pair. This company has 2 different sales mediums that they utilize: Amazon and their website. Amazon charges them an additional fee to sell their product on the platform. This fee can range from 6%-45% with most sellers falling in the 18%-30% range. Let imagine that the clothing company is charged 25%. This means that $25 of every pair of jeans sold goes to Amazon. To calculate ROAS in this situation, we substitute the ad spend with the Amazon fees. Thus, the ROAS on the Amazon sale is a 4x. Meaning the clothing company receives $4 for every $1 they pay in Amazon fees.
Now let’s move on to where the ROAS target should be set. If we assume that the Amazon ROAS stays steady at a 4x, that means that it should be the clothing company’s goal to beat a ROAS of a 4x. Any ROAS higher than this means that the jeans will be more profitable than Amazon. If we look back at the previous example where the clothing company sold $1000 in jeans with an advertising spend of $100, we can start to see where the profitability changes. The ROAS for this situation was a 10x, meaning after advertising costs the company would receive $900. In the Amazon situation, the company has a 4x and would only receive $750 after the cost of the Amazon fees. By spending the advertising dollars on social media, the company has made an additional $150 in profit!
Other Information to Consider
Now that ROAS is no longer a foreign concept, here are a few more things to keep in mind.
- Knowing your numbers is very important! Make sure that you have calculated your actual selling costs to ensure that the most profitable channels are being utilized. Just because a selling platform is bringing in sales, does not automatically mean that it is more profitable than other platforms.
- ROAS is hard to guess. We often get asked by our clients what we think that the ROAS for their products is going to fall at. Without having historical data to go off of, it is extremely difficult to know. With some certainty, we can usually say that it is going to be above a 3. With data and optimization, the ROAS generally rises in the first month of the campaign as we make tweaks to the campaign. The best way to find out where ROAS is going to fall is to spend some money on ads in a test.
- How big can ROAS go. The default way to view ROAS is to desire the biggest one possible. This is not always the way that it should be viewed. Think of the pool of consumers as apples on an apple tree. The ones lowest to the ground are the easiest to reach and will require less labor (or ad spend). When you are harvesting these consumers, ROAS is going to be very high. After all, these consumers are the most likely to buy already and therefore the easiest to sell. As you move up the tree, you soon require a ladder to reach the apples. This means that it requires more labor (or ad spend). It is still profitable to pick these apples, but costs are going to be higher. If you choose to only target the easiest consumers, you will be leaving a lot of potential sales out there. In essence, you are missing out on a large amount of market share. The moral of the story is: Higher ROAS does not always equal more profitability or success in the long run.
4. Trust the experts. The experts at Venture Creations have a lot of combined years of social media experience. We know the tips and tricks to maximize the effectiveness of campaigns, from audience creation to creative to metric analysis. Our team works to figure out the best way to market your brand and its products!