What is it?
ROAS, or Return On Ad Spend, is a ratio of your revenue vs. spend that shows how profitable your ads are. We will be using this as our benchmark to optimize towards in this example because ROAS is the guiding light for most eCommerce brands. If you are in the SaaS/B2B space, this might look like Cost Per Lead, but the fundamental principle remains: how much did I get back for my money spent?
Of course, there is an elephant in the room – this metric (ROAS) is likely wrong. Yes, you heard me correctly. Unfortunately, with all of the issues surrounding attribution, especially lately, it’s tough to understand what your ROAS actually is. The metric shown in Facebook is almost certainly wrong because Facebook no longer has the ability (not that it ever truly did) to correctly attribute sales to specific campaigns, ad sets, or ads.
For your own performance measurement, you could look at your MER (Marketing Efficiency Ratio) to determine whether or not advertising is sustainable. However, that is separate from today’s exercise.
Another method you can use for the time being is creating a new ROAS column in your dashboard that will consider FB’s modeled data. This method won’t be a fix-all forever but should help in the meantime. You can learn more about that here
What am I looking for?
With that out of the way, let’s look at ROAS. Something to keep in mind is that ROAS at different stages of the sales funnel SHOULD look different. For example, in a typical eCommerce funnel, it’s usually okay for ROAS in prospecting to be somewhere around a 1x. In contrast, ROAS in the bottom of the funnel retargeting could be around 3x at a minimum. ROAS goals are entirely dependent on each company’s goals, margins, etc., but this is an excellent place to start.
The reason for this is purchase intent. Those at the top of the funnel are cold and have lower purchase intent, meaning that they will likely cost more to convert right away, whereas those in the bottom of the funnel are higher in purchase intent, it making it cheaper to convert them as they’ve already been exposed to the brand/product a few times.
It’s also usually okay to take a slight loss on prospecting (ROAS of around 0.8x, for example) as the initial acquisition is the most expensive part. If your lifetime value is substantial, you can make up that money over time. This won’t be true of single SKU impulse purchase shops; however, if you have a strong retention strategy, this may be a tactic you can use. That said, the closer you get to breaking even or above with a 1.0x ROAS, the better off you’ll be in prospecting.
How do I optimize this?
This is a broad question, unfortunately. Usually, ROAS is the first indicator that I look at in determining if a campaign/ad set/ad is working, and if it’s not meeting my goal benchmarks, I will dig into the ‘why’ further by looking at other metrics.
To figure out how to improve ROAS, we have to look at some other metrics and see what issues we can uncover and resolve.
So, without further adieu, here are the top 5 steps I take to figure out why ROAS is low and what I do to resolve it.