Advertising is the backbone of Amazon's operations. In 2021, Amazon generated $31 billion from its advertising services. It was a 58 percent increase from last year. These numbers show that sellers are becoming more reliant on advertisements and consequently increasing their ad spending.
With mounting ad expenditure, it is paramount for sellers to evaluate their advertising performance proactively. It will ensure they are making the most of their advertising budget.
ROAS is one of the advertising performance metrics that can help sellers understand how they fare with their PPC campaigns. By keeping track of ROAS, you can determine if a particular ad campaign is paying dividends or is it just making your ad budget bleed.
What is ROAS? How do we calculate it, and how is it different from ACOS?
We will answer all these and many other relevant questions in this post.
ROAS stands for Return on Advertising Spend. It is like ROI but only for marketing-related investments. ROAS is a very prevalent advertising performance indicator in the digital world. In simple words, it is that particular revenue you make through the money you’ve spent on advertisements.
Google is one of the first few platforms that introduced ROAS for tracking the performance of Google ads. Today, ROAS is a significant advertising KPI on almost every small and large platform operating in the digital domain, including Facebook, Instagram, and Amazon.
ROAS in Amazon has the same meaning as it has on Google or any other platform. Amazon ROAS is essentially the return on all the capital you have spent on Sponsored Brand, Product, Display, and different types of Amazon ads. Amazon considers ROAS a good performance indicator for ad campaigns. This is why ROAS is one of the key points of analytics in the Campaign Manager section of your Seller Central account.
There is a general formula that you can use to calculate ROAS for Amazon ads. You can also use this formula for any other form of advertisement that directly generates sales.
The formula goes like this:
ROAS = Attributed sales from ads / Total ad expense
You can modify this formula in the Amazon context for your convenience.
ROAS = Sales generated from Sponsored Products, Brands, and Display ads/ total money spent on those ads
So, if you have succeeded in earning the revenue of $1,000 from sponsored Amazon ads while spending $200 on the ads, your Amazon ROAS will be:
ROAS = 1,000/200
ROAS = 5
ROAS “5” means your return is five times the actual ad spend. Thus, you can also denote the same ROAS value in multiples.
ROAS = 5x
The ROAS value here shows that a seller has managed to earn $5 on every dollar spent on ads.
ROAS can also be presented in the form of a percentage. But, first, run the standard ROAS calculation.
ROAS = 1,000/200
ROAS = 5
Then, multiply the obtained value/answer with 100. It will give you the ROAS value in percentage.
ROAS% = 5 x 100
ROAS% = 500
You can read it as: a 500 percent return on the Amazon ad spend.
A sound marketing/advertising strategy is about spending less and earning more from it. ROAS also underlines this universal advertising principle. ROAS represents the difference between the ad-attributed sales and ad expense— the higher that difference, the higher the ROAS.
ROAS is a quantitative KPI, not a qualitative one. Therefore, you can have its maximum and minimum values. Let's look at what possible maximum and minimum ROAS Amazon sellers can have.
Theoretically, there is no limit to maximum ROAS. It all depends on how well a seller can execute their advertising strategy to earn more on every dollar spent on ads. For instance, a $100 return on a $1 ad spend means a 100x ROAS. You can even top that figure if you manage to get a $1,000 return on a $1 ad spent. In short, there is no ceiling for maximum ROAS.
However, such outrageous ROAS values are not attainable in reality. Usually, Amazon sellers linger in the range of 2-4x ROAS. Therefore, anything beyond 5x ROAS will become a maximum ROAS for most Amazon sellers.
When it comes to maximum ROAS, the sky is the limit. However, that’s not the case with minimum ROAS. You need to maintain a certain ROAS level at the lower end to keep your selling operation sustainable.
Therefore, every Amazon seller must be aware of the minimum ROAS value. This knowledge will ensure you don’t put up with a loss-making advertising strategy.
To find your minimum Amazon ROAS, you first need to find your Profit Margin for each product unit. You can get it once you subtract the Cost of Goods Sold (COGS) and Amazon fees from the sales price of each unit. COGS includes the product procurement price and related shipping and packaging costs. Meanwhile, Amazon fees include referral fees, FBA charges, storage charges, etc.
Profit Margin = Product Price - COGS - Amazon Fees
Suppose your gross revenue on the sale of a single unit is $100, and you have to pay $40 and $20 in COGS and Amazon fees respectively.
Profit Margin = 100 – 40 – 20
Profit Margin = $40
On every product, you have a profit margin of $40. It means you can’t spend more than $40 on ads to make a single sale of that particular product unit. This $40 will be your minimum ROAS where you are making no profit or loss on your sale. In other words, minimum ROAS is the return where you can manage to reach breakeven with your ad-sponsored sales.
You can also derive the formula for minimum ROAS from the above calculations.
Minimum ROAS = Selling Price of a Product / Profit Margin
For the above example:
Minimum ROAS = 100/40
Minimum ROAS = 2.5
The minimum ROAS of 2.5 means you need to earn 2.5 dollars on every dollar you spend on ads to reach the breakeven point.
There is no fixed good ROAS value for Amazon sellers. Anything above minimum ROAS can be considered good. The above section suggests that the minimum ROAS value can vary from product to product and seller to seller. Therefore, the same ROAS value can be great and disastrous for two different sellers, depending on their profit margin and minimum ROAS.
Therefore, a low ROAS can be a good ROAS if you have a healthy profit margin. For instance, if your profit margin is 60%, ROAS of 2x will be profitable. On the other hand, ROAS of 2x won’t cut it for profit margins below 50%.
In general, a ROAS of 3x or above remains a good advertising spending return for most sellers.
A ROAS becomes profitable when you go beyond the breakeven point in sales with your ad spending. So, for instance, if you have a ROAS of 1 and you’re still taking home the profit after the deduction of all the expenses (COGS, Amazon fees, advertising cost), it will be considered a profitable ROAS.
You can find your ad campaigns’ ROAS (already calculated and updated) on your Seller Central account.
You can use different ad types to promote your products on Amazon. For instance, Amazon Sponsored Product, Brand, and Display ads are the options you get on the PPC front. Then, the Amazon Demand-Side Platform (DSP) offers an entire range of audio, video, and other display ads for Amazon as well as other platforms (e.g. streaming app).
The return on ad spending is based on the nature of these different ads. For instance, you may not always get the same ROAS for the same keywords for Sponsored Products and Display ads.
A survey conducted in 2020-2021 gives an insight into how Amazon ROAS changes based on types of ads. The majority of respondents term Sponsored Product ads the best with returns, followed by Sponsored Brand ads and Amazon Demand-Side ads.
Why Sponsored Product ads offer the best ROAS to a user is understandable. For starters, those ads are displayed in search results as well as product detail pages. Most Amazon shoppers reach a product page either through search results or through other listings.
Then, the total bidding cost of sponsored product ads is usually lower than what you need to spend on Brand ads or DSP ads. The less ad expenditure and more conversion potential make Sponsored Product ads great with ROAS.
If you want to increase your ROAS, you need to improve your ad sales or decrease your advertising expense. The best strategy is to take different steps simultaneously to bring down ad spending and jack up ad sales.
Here are some measures that you can take up to increase your Amazon ROAS.
Your ad budget will be consumed based on the keywords you select. Therefore, it is crucial to work around and come up with the set of most “useful” keywords and optimize accordingly. Then, you can further shortlist those keywords after running a couple of short PPC campaigns around the initially selected keywords.
You can select the most valuable keywords based on the following criteria.
Long-tail keywords: Instead of chasing the short-tail keywords with high search volume and a higher click-through rate, you need to focus on long-tail keywords. First, the long-tail keywords are usually less competitive than short-tail keywords. Second, long-tail keywords reflect the strong buying intent of shoppers. A person searching through a long-tail keyword is more likely to click on a sponsored product appearing in the search results. Also, less competitive long-tail keywords generally have lower PPC bids.
Keywords with High CVR: After running a couple of ad campaigns, you can find out your targeted keywords' click-through and conversion rate. Download the advertising report from your Seller Central account and identify the keywords with a high conversion rate (CVR). In the next PPC iteration, you need to focus on those keywords by expanding their budget and increasing their bids (if necessary).
As discussed in the above section, different sponsored ads on Amazon have different conversion rates. The data shows that sponsored product ads do better than sponsored brand ads on the conversion front. Therefore, you can allocate more ad expenditure to sponsored product ads to leverage their inherent higher conversion rate.
Amazon lets you have the broad, phrase, and exact match biddings for the search keywords. Broad and phrase matches respond to search queries even if those queries have other words and phrases. In contrast, exact match bidding is the most accurate in matching keywords with the search query.
When you select a key phrase for an exact match bidding, your corresponding ad will only appear if a buyer enters the exact same search query. If you have conducted detailed keyword research for your product, you can select the phrases that make suitable exact matches.
If done on the right queries, exact match bidding can give you almost a 100% click-through along with a good conversion rate.
Dynamic bidding is an excellent feature in the ad campaigns section of your Seller Central account. It allows you to keep your bids “adjustable” based on Amazon’s evaluation of the chances of conversions. There are two dynamic bidding options: "up and down" and "down only".
If you choose “up and down” dynamic bidding, your bid can increase or decrease with the changing Amazon assessment. On the other hand, if Amazon concludes that you are less likely to convert for the ad placement, the "down only" option will reduce your bid.
The use of the "down only" option is useful for decreasing your ad spend bleeding, which can help you maintain and improve your ROAS.
Another way to optimize your ROAS is to increase your Average Order Value (AOV). AOV is the total sales price of the listing that you’ve promoted through Amazon ads. Since Amazon ads operate on the PPC model, the sales price of the marketed product should be far higher than the per-click cost for its listing (for a good ROAS).
Increasing AOV can create a more significant difference between your ad sales and ad expense, resulting in higher ROAS. The best way to increase your AOV is to bundle low-value similar products in a listing. If applicable, you can also use the upselling technique to increase your AOV.
It is worth mentioning that price gauging is not the right way to increase AOV. Increasing the price won't just diminish your chances of winning the Buy Box. It can also get your listing banned on the platform.
Lastly, you need to be on top of your game with the listing content. Sponsored ads can only help you with bringing in clicks. Whether those clicks convert into purchases depends on the information you provide in the listing. How you display your product and outline its features often are the decisive elements in converting users who have clicked on your listing from the ad placement.
Before wrapping up this article, it is imperative to discuss ROAS and ACOS and clear all the confusion around these two metrics. Like ROAS, Advertising Cost of Sales (ACOS) also plays a vital role in advertising analytics. ROAS and ACOS are often used interchangeably because they show the same performance picture with slightly different perspectives.
While ROAS tells you how much “return” you get on the money you’ve spent on advertising, ACOS tells you how cost-intensive are your ad-attributed sales.
You can calculate ACOS using this formula:
ACOS = Ad spend / Total attributed sales
If you closely look at the above formula, it is the inverse of ROAS. Let’s calculate ACOS with the same example used for ROAS calculation.
ACOS = 200/1000
ACOS = 0.2
ACOS = 20%
By using the ACOS value, you can say that you’ve spent 20 percent of the total sales revenue on advertising to generate the corresponding sales volume.
ACOS is the inverse of ROAS. Therefore, you can easily convert ROAS into ACOS using this simple formula.
ROAS = 1/ACOS
ROAS = 1/0.2
ROAS = 5
We are writing two statements about the same ad campaign here. You can read them and get the gist of how ROAS and ACOS represent the same thing while still giving two different perspectives.
The below chart can sum up the ROAS vs. ACOS debate for you.
We hope that the above discussion helps you understand what ROAS stands for and its role as a key performance indicator for advertising campaigns. Every Amazon seller needs to aim for the highest possible ROAS value. It is only possible by improving the profit margin and actively managing the cost of clicks for ads.
A higher ROAS means greater returns on advertising expenditure, which is a key attribute of a thriving Amazon business.
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