When people spend money promoting their businesses, they want to know their return on that expenditure.
The same goes for Amazon sellers who significantly spend on PPC campaigns. They want to know what they’re gaining from that cash outflow and if that gain is good, bad, or just okay.
ROAS (Return on Ad Spend) is the performance metric that calculates the return on the promotional expense of Amazon sellers. A good ROAS means a seller is making the most of their ad spend.
In this post, we will discuss in detail what a good ROAS is and how to achieve it. We’ll also discuss how ROAS is calculated and answer many other relevant questions here.
Before discussing good or bad ROAS values, it is imperative to discuss if it is even a good performance indicator of Amazon advertising. It is worth mentioning that this metric is not just limited to Amazon advertising platform.
From Google to Facebook, every major online platform uses ROAS to indicate advertising performance. So, there are multiple reasons why ROAS makes a good metric.
ROAS is an effective tool for understanding where you’re spending more than you should. For example, through ROAS calculation, you can identify the campaigns where you are only reaching break-even (ROAS 1x). Similarly, you can recognize the campaigns where ROAS is even below 1.
ROAS 1 or below 1 indicates that you’re experiencing ad budget bleeding. In other words, you are spending money without getting any return on it (in the form of ad-attributed sales). This diagnosis helps you revise your ad budget allocation.
You can drop the campaigns with low ROAS and redirect that budget to more yielding PPC campaigns.
ROAS can also help you identify the best keyword and ad type combos for your paid promotions. For example, you may find that a specific keyword used in a sponsored brand ad offers extremely good ROAS. Similarly, some long-tail keywords are best suited for sponsored product ads.
Finding optimal advertising combinations mean you can scale your paid promotions in the right direction for the best possible results.
The value of ROAS can also tell you how much your sales operation depends on ads. You can inverse the value of ROAS to find ACOS (Advertising cost of sales) and TACOS (Total Advertising Cost of Sales). The value of TACOS tells you the overall profitability of your business and how much your sales volume is reliant on paid promotions.
No ROAS value can be universally termed “good”. For every Amazon seller, different ROAS values are desired. Similarly, the same ROAS value can be good for one seller and bad for the other. Generally, ROAS greater than 3 is considered a good ROAS for many sellers across most product categories.
In general, Good ROAS entails a scenario where you can make more in ad-attributed sales than what you’ve spent on COGS, Amazon fees, and promotions. It means ROAS is not just a function of ad spend. It also depends on the Cost of Goods Sold (COGS) and the fees you pay Amazon for different fulfillment chores.
Similarly, only ad spending doesn’t dictate the goodness or badness of ROAS. Its COGS (product procurement, shipping, and packaging costs) and Amazon fees also determine if a particular ROAS value is good or poor.
Therefore, a seller may be happy to get 2x ROAS if they have lower COGS and Amazon fees. On the other hand, a seller perhaps doesn’t make the most of paid promotions even with 3x ROAS due to higher COGS and FBA-related costs.
Good ROAS is any value where you make more than what you spend on Ads. Moreover, the above discussion has established that COGS and Amazon fees affect ROAS. So, in other words, your profit margin also plays an integral role in determining the status of ROAS.
The product profit margin for an Amazon seller will be:
Margin = Listing Price - COGS - Amazon Fees
In view of these findings, Amazon sellers can determine what can be a “Good ROAS” for them. However, they first need to find Minimum ROAS for the given product.
The formula to find minimum ROAS is simple:
Minimum ROAS = Listing Price of an Item / Margin
For any seller, any ROAS value higher than the minimum ROAS will be considered good— the higher the value above the minimum ROAS, the better the absolute ROAS.
Let’s try to make better sense of minimum and good ROAS calculation with the help of an example.
Suppose a seller bears COGS of $20 and pays $15 in Amazon fees to sell a product at $60. Their profit margin will be:
Margin = Listing Price – COGS – Amazon fees
Margin = 60 – 20 – 10
Margin = $30
Using this value, we can find the minimum ROAS:
Minimum ROAS = Listing Price of an Item / Margin
Minimum ROAS = 60 / 30
Minimum ROAS = 2
The minimum ROAS value suggests that you need to earn two times your ad expenditure to attain the break-even point. In other words, if you’re making $2 in ad-attributed sales for every dollar spent on ads, you’re running operations at no profit or loss.
In the above example, any ROAS value greater than 2 will indicate a profitable paid campaign. This profitable ROAS can also be termed a good ROAS. Moreover, its “goodness” can be gauged by how high it is compared to the corresponding minimum ROAS.
For instance, 3x ROAS is a decent value where the minimum ROAS is 2x. However, the same 3x ROAS is a great ROAS where the minimum ROAS is 1.5x. This calculation also demonstrates the relative nature of ROAS value, i.e. the same ROAS value can have different meanings and implications for different sellers and listings.
Given the wide variety of products and various selling and advertising factors, it is challenging to pin down the average ROAS on Amazon. For instance, the promotion of electronic products usually offers ROAS up to 9x. On the other hand, toys, games, and apparel usually yield 3-4x ROAS.
Considering all the product categories sold on Amazon and how different sellers operate, ROAS 3x seems like an average ROAS value across the platform, including all its different marketplaces.
Having more sales while spending the same amount of money on advertising is something that every Amazon seller wants. However, it is only possible if you strive to improve your ROAS and take it from average to good for your respective product category.
These are some measures you can take to achieve good ROAS for every product category.
When choosing the keywords for your PPC campaigns, focus on long-tail keywords. There are multiple reasons why long-tail keywords make for more yielding ad campaigns.
Manually searching and choosing long-tail keywords can take a lot of time. Also, your research remains confined to your own judgment instead of objective data points. However, you can get around these issues by using this tool.
With its 14 data points, this tool can come in quite handy in finding the most valuable long-tail keywords for all sorts of products within minutes.
Once you have a list of long-tail keywords, you can further trim it by picking the ones with a higher conversion rate. You must run a trial PPC campaign with your initially selected long-tail keywords for this shortlisting.
Then, download the analytical report of the trial ad campaign from your Seller Central account (Reports → Advertising Reports). This report outlines many performance indicators, including conversion rate (CVR). Identify the keywords with high CVR and list them down for your actual PPC campaign.
If you’re new to Amazon selling and thus relying on automatic keyword targeting for your PPC campaigns, you can maintain good ROAS by carrying out negative keyword targeting. In automatic targeting, Amazon’s algorithms sometimes pick keywords for sponsored product ads that seem relevant at first sight. However, they’re not.
For instance, Amazon automatic targeting may run a sponsored product ad for “wooden dinner chairs” for the keyword “outdoor chairs”. However, most people looking for outdoor chairs will be least interested in wooden chairs meant for a dinner table. In other words, this PPC targeting will miss its target, and hence the keyword it focuses on is a "negative keyword".
You can identify the possible negative keywords for your product and configure your campaign to ensure your ad budget doesn’t bleed on those futile search phrases. Lesser ad budget bleeding also leads to better ROAS.
Amazon advertising operates on an auction-based system where you place bids to display your product ads to targeted shoppers. Amazon ad bidding involves various details. However, you need to focus on these two to achieve a good ROAS.
Dynamic bidding is an outstanding feature in Seller Central’s ad campaigns section. Through dynamic bidding ("up and down" and "down only"), you can sync your bid with Amazon’s assessment of the conversion probability.
So, if you pick “up and down” dynamic bidding, your bid will go up and down, depending on Amazon’s evaluation. The other type of dynamic bidding, "down only," comes into play when Amazon concludes that your listing is less likely to convert for the given ad placement.
You have three options for keyword matching: broad, phrase, and exact match biddings. The first two match types activate your bid for search queries even if those queries have other words. On the other hand, exact match bidding only responds to search queries that match the targeted keyword word by word.
Therefore, when you choose a keyword for an exact match bidding, your bid for the corresponding ad placement will only activate if a shopper uses the exact search query as your targeted keyword. You can shortlist the phrases that make suitable exact matches by carrying out comprehensive keyword research on your product.
You can attain a phenomenal conversion rate by using exact match bidding for the right set of keywords. Witnessing good conversion on promoted listing means you will get good returns on your ad expenditure.
ROAS can only increase if you can make maximum conversions from your listing ads. While keyword selection and bidding maneuvers are integral in improving conversion, you can’t ignore the quality of your listing content.
Even if your keyword and bidding strategies pay off and bring visitors to your listing, you won’t be able to convert them into buyers with poor listing content. Blurred/unfocused images not capturing product details, repetitive bullet points, and sloppy product descriptions will only neutralize all your efforts to achieve good ROAS.
You can also achieve good ROAS by increasing your Average Order Value (AOV). AOV entails the total amount of money a shopper spends on your listing/store in a single session.
For a good ROAS, your AOV should be far higher than the PPC expense (per-click cost) of promoting a listing.
You can create a significant difference between your ad-attributed income and ad expense by increasing your AOV. This is because more ad sales with the same ad expense mean better ROAS.
An effective way to increase your AOV is to bundle low-value similar products in a listing, e.g. bundle of small kitchen accessories or bathroom supplies. Depending on the product type, you can also leverage upselling practice to increase your AOV and ROAS.
The above discussion has established that generally higher ROAS is equivalent to good ROAS, and low ROAS means bad ROAS. However, this rule doesn’t hold for every scenario. Here, we will list down two conditions where low ROAS doesn’t necessarily mean bad ROAS.
It's pretty normal to have low ROAS during the first two weeks after starting PPC campaigns. Most of this time is spent running trial campaigns to find the best keywords for long-run ad campaigns. Therefore, don’t fret if your ROAS remains below 3x during the first few days of PPC advertising.
If you like to maintain ad positions for specific keywords to improve brand visibility, your ROAS will remain low. This is because such brand-centric ads witness fewer conversions and hence keep ROAS low. However, a low ROAS due to branding is not a bad ROAS because establishing brand familiarity with relevant keywords through this exercise will pay you dividends in the coming time.
Before we sign off, answering these repeatedly asked questions about ROAS on Amazon is imperative.
ROAS should always be as high as possible. Higher ROAS indicates a high return on advertising expenditure, which is always a good outcome for every seller.
In theory, there is no ceiling for maximum ROAS. It all depends on a seller—how much they can make in sales on every dollar spent on ads. On the other hand, minimum ROAS is that value where a seller makes no profit or loss by their ad-attributed sales.
Amazon ROAS calculation is as simple as it is for any other platform. Divide the ad-attributed sales amount by the money spent on those ads. Mathematically, it can be written as:
ROAS = Ad-attributed Sales/Total Ad Spend
Good ROAS represents a well-oiled Amazon business that operates in profit. Thorough and intelligent keyword selection for ad campaigns, better PPC bid management, captivating and informative listing content, and higher AOV can help you achieve good ROAS.
ZonGuru’s Keywords on Fire helps with both keyword research and bid management. Meanwhile, Listing Optimizer empowers you to turn around the listing content to achieve the best possible optimization. In other words, using ZonGuru's seller toolkit can fast-track and streamline your journey to get good Amazon advertising ROAS.
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