What is a good ROAS (return on ad spend)? This is a recurrent question from digital marketers.
If you have the same question in mind, this article has the answers for you. Read on to learn what is a good ROAS for your e-commerce business, Facebook ads and Google Ads.
- What is ROAS?
- What is a good ROAS for Facebook ads?
- What is a good ROAS for Google Ads?
- What factors determine a good ROAS?
- Return on ad spend: The higher the better?
- Some last words
What is ROAS?
Short for “return on ad spend”, ROAS is a metric for measuring the effectiveness of advertising campaigns.
It refers to the amount of revenue earned for every dollar spent on a campaign, and can be computed with the formula below:
ROAS = Total campaign revenue / Total campaign cost
Example: You spent $3,000 on an online advertising campaign this month. Revenue attributed to this campaign equals $15,000.
ROAS for this campaign = $15,000 / $3,000 = 5X, or a ratio of 5:1.
A ROAS of 5X means that for every dollar you spend, you earn $5 of revenue.
What is a good ROAS for Facebook ads?
A good ROAS for Facebook ads ranges somewhere between 2X to 4X. However, the figure may vary depending on your industry, ad placement and other factors (more on this below).
Empirically, a survey by Databox found that most marketers achieve a ROAS of 6X to 10X in their ad campaigns.
In the same survey, approximately one-fourth of respondents get 4X to 5X, followed by some saying they only get less than 3X on average.
80X return on ad spend is also observed by some marketers, but these are only the minority, accounting for around 5% of all respondents.
ROAS across different ad placements also show significant differences, according to an e-commerce KPI report published by Wolfgang Digital:
What is a good ROAS for Google Ads?
A good ROAS for Google Ads stands at around 4X.
This number is reached based on the assumption that the average ROAS for Google Ads is 2X (suggested in the Google Economic Impact Report), as well as common benchmarks used by marketers.
“To estimate the economic impact of Google Search and Ads, we rely on two conservative assumptions. First, we assume that businesses make an average of $2 in revenue for every $1 they spend on Google Ads. Our chief economist, Hal Varian, developed this estimate based on observed cost-per-click activity across a large sample of our advertisers; his methodology was published in the American Economic Review in May 2009…”
What factors determine a good ROAS?
While there are no hard and fast rules to determine what is a good ROAS, one can consider the following:
- Your industry
- Category maturity
- Advertising channel
1. Your industry
Every industry serves a unique demographic, characterized by consumers with different backgrounds, purchasing power and behavior.
This reason combined with the fact that some industries are more competitive than others, the average ROAS across industries vary significantly.
So how would you know whether your ad campaigns have a strong ROAS?
The best practice is to compare your business’s ROAS with that of similar companies, such as your competitors or businesses in the same niche.
2. Category maturity
Category maturity is a measure of how novel your product or service is in the market. It tells you about how well people understand your product, hence the degree of effort you’ll need to educate your audience about it.
For example, “fashion” or “clothing” is a household word that even a ten-year-old understands. As a fashion retailer, you certainly don’t need to tell consumers what a dress, scarf or jacket is.
On the other hand, revenue-based financing (RBF) represents a relatively nascent space, especially in Asia-Pacific regions. Business executives — even those who would benefit from this form of business financing — may not know what it is, let alone be interested in it.
In the latter case, advertisers have an extra step to take: educating their target audience on their offering. Their ad campaigns will likely be a mix of education and profit-based marketing. As a result, their return on ad spend will likely be lower than that of clothing advertisers.
What is revenue-based financing?
Revenue-based financing (RBF) is a form of financing for businesses. RBF platforms, such as Choco Up, would provide you with funding to grow and scale your business, in return for you sharing a small percentage of your revenue until a predetermined amount is paid back.
3. Advertising channel
If there’s a lesson learnt from the Covid-19 pandemic, it’s that the online channel is critical for business success.
This is precisely the reason why businesses of all sorts are now racing to capture consumers’ attention in the digital arena, pushing up advertising costs to new heights.
Advertising on Facebook, for example, now costs 47% more than the year before. As a corollary, marketers see significant decreases in their return on ad spend on the social media platform.
It’s a hard and irreversible fact that advertising on the more established social media platforms now costs more but yields lower returns. Many marketers therefore have turned to relatively unsaturated channels, such as TikTok for better return on their ad budget.
So when you are evaluating (or if your boss asks) whether your business’s ROAS is a good one, don’t forget to take into account the advertising channel that you’re using.
Return on ad spend: The higher the better?
Even with a modest or negative ROAS, some businesses make money and stay profitable over the long term. An example is a new entrant aggressively spending on ads to capture the largest market share possible, reaping rewards as it later secures the leadership position in the industry.
On the other hand, campaigns with apparently high returns could lead to unprofitable sales. Continue reading to learn about the reasons behind.
1. Profit margin
As they just enter the world of digital marketing, a lot of marketers make the same mistake: taking ROAS as the sole indicator of campaign effectiveness.
Think about it carefully. What good does ROAS have if you’re not making a profit from the sales driven by the campaign?
To illustrate this, let’s look at the hypothetical example below.
Example: Below shows the data of a catering business, which makes money by providing food and beverages at large-scale events. It runs an ad campaign on Facebook and gets the following results.
Because the caterer serves a large group of people at a time, average order values (AOV) are quite high, hence a revenue of $1,000.
At the same time, potential customers ask a lot of questions about food options and portions. Customer support therefore contributes significantly to operating expenses.
For this ad campaign, the caterer has a ROAS of $1,000 / $250 = 4X. For every dollar spent on ads, they earn $4 back!
Judging by the benchmark of “2X to 4X being a good ROAS for Facebook ads”, this ROAS is a pretty good one. So this ad campaign is a worthwhile investment, right?
On the face of it, yes. But when you take a closer look, not really.
Viewed in isolation, the ad campaign is making a good return on spending. Considered as a totality, however, the caterer is making a loss on the sales it makes:
This is part of the reason why we think there’s no absolute formula for determining what’s a strong ROAS. Every company is unique, with different business models and cost structures.
Pro tip: When profit is the objective of ad placements, consider measuring and reviewing your profit on ad spend (POAS) regularly.
It helps you understand how much profit you make from each ad dollar, and can be calculated with the following formula:
POAS = Total campaign profit / Total campaign cost
2. Customer lifetime value (CLV)
Customer lifetime value refers to the total amount of money that a customer is expected to spend with your business during their lifespan. It’s a key e-commerce metric that every online business should keep track of.
Customer lifetime value (CLV) = Customer value x Average customer lifespan, where Customer value = Average purchase value x Average number of purchases
As opposed to ROAS, which assesses an ad’s immediate return, customer lifetime value is a long-term measure of the business value that your ads bring to you.
Sounds too vague to you? Consider the illustration below.
Example: Your business sells lotion that treats eczema. You’re running an ad with the objective of bringing more revenue for your online store. ROAS is approximately 1X, i.e. you earn $1 for every ad dollar spent.
Though the ad doesn’t bring particularly attractive returns straight away, customers acquired through advertising tend to stick with you for a long time. Customer data are as follows:
- Average customer lifespan: 10 years
- Average number of purchases: 12
- Average purchase value: $58
In this case, the customer lifetime value is $58 x 12 x 10 years = $6,960.
So each customer spends nearly $7,000 with you throughout their lifetime. That number is HUGE for a consumer retail business.
That’s why ROAS isn’t a decisive indicator of whether your ad campaign is a worthy investment. Campaigns that bring you loyal customers are worth the price for the value they bring to you in the long run.
Some last words
Digital advertising works like the magic wand of a conjurer. It has the ability to turn ad dollars into something more, often compounding what you spend to bring returns in multiples.
However, many fast-growing businesses find their growth constrained by financial capacities. Oftentimes, they want to spend more and grow faster, but they can’t because they don’t have the budget to do so.
If you’re looking to step up your digital marketing efforts, leveraging the power of ads to bring compound returns, Choco Up can lend a helping hand.
We provide zero-equity funding for fast-growing companies, with no fixed repayment schedules, no fixed payment amounts and no complex application procedures.
Just complete our online form here (it takes 2 minutes only) and connect a few accounts to get your FREE preliminary offer today!
About Choco Up
Choco Up is a global technology and financial services platform, offering revenue-based financing and business growth solutions for digital merchants and startups.
With data analytics and machine learning at its core, Choco Up employs vast integrations to automate fund deployment, providing fast-growing companies with zero-equity funding in a quick and seamless manner.
We currently have offices in Singapore and Hong Kong and serve clients worldwide, providing smart-growth analytics and global payment solutions to fuel their growth.