Spending money on ad campaigns is an essential part of running an ecommerce business. An online business that survives purely on organic traffic is a rarity in this day and age.
97 per cent of marketers believe in the power of ad campaigns and heavily invest in them. The probability that your revenue will increase during the campaign is high, but do you really know if ad campaigns perform well? Although you can turn to experienced ecommerce accountants to help you answer that question, you can also look into your Return Ad Spend (RoAS) numbers.
In this article, we will explore what RoAS is, why it matters, and how you can use it to your advantage.
What Is Return On Ad Spend?
RoAS is a metric for determining the effectiveness of an ad campaign based on its raw profitability. The basic formula for this metric is RoAS = (Revenue – Total Ad Spend)/ Total Ad Spend.
To better understand the concept and the formula, here’s a quick example. Imagine that you’re running an ad campaign on Google Ads and decided to spend $100 on it. After the campaign, you checked Google Analytics and found that the campaign generated $500 in revenue.
In this case, your RoAS computation will look something like this: RoAS = ($500 - $100)/ $100. This computation shows that you earned four times the amount you spent on the ad campaign or a 400 per cent RoAS.
Quick Tip: Although a higher RoAS is always preferable, the summary below can help you determine if your RoAS is enough.
Higher than 15: You may be underspending
11 to 15: Awesome
5 to 10: The sweet spot
4: Fair enough
Below 4: You may be overspending
Why Return On Ad Spend Matters
The temptation to spend more on ad campaigns is great, especially if you consider that they bring in more revenue. You can’t give in to this temptation easily because, in reality, the results of ad campaigns vary.
RoAS can help you determine if you should spend more, spend less, or maintain the current spending. With RoAS you can make more informed business decisions when it comes to your ad campaign spending. Your savings will thank you, and so will your e-commerce accountant.
How To Use Return On Ad Spend To Your Advantage
Most of the time, profit is the basis for business success. In an online business, RoAS can help determine that. RoAS is a metric of ad effectiveness, but when you have to use it with data points like gross margin and lifetime value to get a sense of a campaign’s profitability.
Gross margin is the amount of money you gain from sales after taking out the cost of the goods sold (CoGS). Lifetime value (LTV), on the other hand, is the net profit that you will get from a customer over the lifetime of their patronage.
Here’s another example. Suppose that you break even with the ad spend and gross margin. You don’t need to compute anything to know that RoAS will be low. However, if one of the new clients you gain from the campaign goes on to spend a lot on your other products regularly, your LTV will be high. This can justify the money you spent on the ad campaign with a relatively low RoAS.
Online businesses that survive on organic traffic alone are very rare. Spending on ad campaigns has become commonplace to ensure business survival and competitiveness.
Return on ad spend is a metric that can give you a more concrete picture of an ad campaign’s performance. This piece of data can help you optimise your ad spending behaviour to ensure that you’re reaching your target audience as effectively as possible.
If you are looking for some of the best e-commerce accountants in the business, turn to The ECommerce Accountant. Our experienced team of accountants have a passion for all things ecommerce and are more than happy to help you sort out your business finances. Book a free strategy session with us today!