How Businesses Can Leverage ROAS for E-commerce Marketing

Every great product has the potential to capture the market. In the dynamic world of e-commerce, however, simply having a great product isn't enough. It needs a voice.

That’s where effective marketing comes in. It doesn’t just put your name out there—it makes sure your product is seen, appreciated, and chosen by potential customers. Effective marketing highlights your products and actively engages potential customers, creating a pathway for them to discover and interact with your brand.

Understanding and tracking marketing metrics is crucial to measure the impact of your marketing efforts. These metrics provide insights into the efficiency and effectiveness of your campaigns, guiding future marketing decisions. One such metric that e-commerce businesses frequently use to evaluate their marketing strategies is Return on Ad Spend (ROAS).

What is ROAS?

Return on Ad Spend (ROAS) is a critical metric for assessing the effectiveness of advertising campaigns. It measures the gross revenue generated for every dollar spent on advertising. The ROAS formula is straightforward:

ROAS = (Revenue Generated from your Ads) / (Ad Spend)

This calculation gives e-commerce marketers a clear picture of their advertising campaigns' profitability, to help them determine which strategies yield the best returns and deserve further investment.

With this in mind, what is considered a good ROAS? The answer largely depends on your specific business goals, risk tolerance, operating expenses, and other industry-specific factors. However, a commonly accepted benchmark within the industry is a ROAS of 4:1. This means that for every $1 spent on ads, you are generating $4 in revenue. This ratio serves as a useful guide for gauging the efficiency of your advertising efforts in relation to your investment.

1. What Other Essential Marketing Metrics Are There?

1.1. Customer Acquisition Cost (CAC)

For businesses aiming to streamline their marketing spend while effectively attracting new customers, Customer Acquisition Cost (CAC) would be their go-to metric. CAC measures the cost of acquiring a new customer, encompassing all marketing and advertising expenses divided by the number of new customers acquired over a specific period.

CAC = (Cost of Sale + Cost of Marketing) / (No. of New Customers Acquired)

To reduce CAC and maximise marketing effectiveness, focus on optimising your advertising campaigns, improving conversion rates, and leveraging more cost-effective marketing channels.

2.2. Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) estimates the total revenue a business can expect from a single customer account over the duration of its relationship with the company. This metric is particularly good for businesses aiming to cultivate long-term customer relationships. CLV is calculated by multiplying the average order value by the number of repeat transactions and the average retention time.

CLV = (Customer Value) * (Average Customer Lifespan)

Where Customer Value = (Average purchase value) * (Average no. of purchases)

Optimising CLV tends to centre on customer satisfaction. In the long run, implementing loyalty programs and increasing upselling and cross-selling opportunities can improve your customers’ e-commerce experience and CLV.

1.3. Conversion Rate (CR)

Commonly used by brands focusing on digital marketing efficiency, the Conversion Rate (CR) indicates the percentage of visitors who take a desired action on a website, such as making a purchase or signing up for a newsletter. CR is calculated by dividing the number of conversions by the total number of visitors and multiplying the result by 100 to get a percentage.

CR = [ (Total no. of conversions) / (Total no. of visitors) ] * 100

To optimise CR, businesses should focus on improving website usability, A/B testing different elements of their online presence, and personalising marketing messages.

1.4. Average Order Value (AOV)

Average Order Value (AOV) tracks the average amount spent each time a customer places an order. This metric is critical for understanding purchasing behaviour and strategising pricing, promotions, and product bundling to increase revenue per transaction. AOV can be calculated by dividing total revenue by the number of orders.

AOV = (Total Revenue) / (No. of Orders Placed)

Strategies to increase AOV include offering free shipping thresholds, product recommendations, and upselling or cross-selling additional products.

2. Comparing ROAS with Other Metrics

ROAS is a pivotal metric in advertising, but it doesn't operate in isolation. It interacts with several other essential marketing metrics, each offering unique insights:

• ROAS with Customer Acquisition Cost (CAC): ROAS focuses on revenue generated per pound spent on ads, whereas CAC measures the cost of acquiring a new customer across all marketing channels. A lower CAC can often contribute to a higher ROAS.
• ROAS with Customer Lifetime Value (CLV): While ROAS measures immediate return from ads, CLV assesses the long-term value a customer brings. Higher CLV can justify lower initial ROAS if customers continue generating revenue over time.
• ROAS with Conversion Rate (CR): CR affects ROAS directly—higher conversion rates generally lead to better ROAS as more clicks or impressions result in actual sales.
• ROAS with Average Order Value (AOV): Increasing AOV can directly boost ROAS, as the revenue from each transaction grows while ad spend might remain constant.

When to Prioritise ROAS

Finding a balance between focusing on immediate ROI and long-term value is crucial in strategic marketing planning. Prioritising ROAS becomes particularly important in scenarios such as:

• Seasonal Sales Campaigns: Maximising ROAS during high-traffic periods like Black Friday or Singles’ Day ensures optimal profitability when consumer interest peaks.
• Product Launches: High ROAS can validate market fit and advertising effectiveness during the critical initial phase.
• Testing New Markets: When entering new markets, a strong ROAS indicates that the marketing message resonates well with the new audience.

Improving ROAS with Insights from Other Marketing Metrics

Enhancing ROAS requires a holistic view of all relevant marketing metrics. For instance:

• Leverage AOV: Increasing the average order value through upselling or bundling can significantly improve ROAS, as you earn more per transaction without proportionately increasing ad spend.
• Utilise CLV: By understanding and extending customer lifetime value, businesses can invest more confidently in campaigns with slightly lower immediate ROAS, knowing these customers will generate more revenue over time.

Conclusion

Understanding the dynamics between ROAS and other critical marketing metrics is essential for optimising e-commerce marketing strategies. A balanced approach to measurement, which includes leveraging insights from CAC, CLV, CR, and AOV, can significantly enhance both immediate profitability and long-term business growth.

If you're looking for a platform that can optimise your ROAS, Choco Up can be your next business strategy. Our services are designed to fine-tune your marketing efforts, ensuring that every penny spent maximises your returns.

Learn more about our e-commerce investors and get the most out of your marketing budget today.