Amazon’s vast marketplace offers immense opportunities, but profitability requires strategic ad spend. With a significant chunk of buyers making swift purchase decisions, smart Amazon sellers focus on increasing their Return on Ad Spend (RoAS).
But what does RoAS mean? And how do you increase it? This article tells you exactly that.
But if you’re struggling with low online sales and RoAS, you might need a team of Amazon PPC experts. At IG PPC, our team has a proven track record of improving the ROI of ad campaigns. Book a free audit call with us today.
What is RoAS on Amazon?
Return on Ad Spend (RoAS) on Amazon is an advertising metric that tells you the revenue you’ve made for each dollar spent on Amazon ads. It provides a clear picture of the effectiveness of your Amazon ad campaigns.
For a business, a high RoAS indicates efficient use of ad spend, which translates to better profitability and more impactful marketing strategies.
What is a Good RoAS on Amazon?
There is no one-size-fits-all answer to what constitutes a good Amazon advertising RoAS, as it is dependent on various factors. However, a benchmark of 3 is generally considered good.
Let’s understand this with an example.
- For a low-margin product, a higher RoAS is needed to ensure profitability because the costs need to be balanced. In such cases, a RoAS greater than 5 is considered good.
- However, for a high-margin luxury product, even a RoAS of 2 can make your ad campaign profitable due to the higher profit margin.
Amazon RoAS Calculation Method
You can easily calculate the Amazon advertising RoAS of your ad campaigns by dividing the total revenue generated by your total ad spend.
RoAS = Total revenue from ad campaign/ total ad spend of the campaign
For example, if you spend $200 on Amazon ads and generate $1000 in revenue, your RoAS would be (1000/200) =5. The higher your RoAS, the more profitable your advertising campaign is generally, assuming costs remain manageable.
You can also use another formula for RoAS calculation:
RoAS = 1/ACoS
What is Amazon ACoS? Well, ACoS measures the amount of advertising spend required to generate one unit of sales from an ad.
How to Calculate Product Profit Margin and Break-Even RoAS
A better way to determine a good RoAS is to determine the minimum or break-even RoAS. Once you have this number, you’ll clearly see when your ad campaigns are running profitably and when they’re not.
Its calculation starts from the profit margin. To calculate it, you have to find out the gross profit first.
Gross profit = product sale price – cost of goods (COGS) – Amazon fees
For example, for a product with a sale price of $50, COGS of $20, and Amazon fees of $15, the gross profit will be:
$50 – $20 – $15 = $15
The profit margin is then calculated by:
Profit margin = (gross profit/product sale price) x 100
= 15/50 x 100 = 30%
To find the break-even RoAS, you need to know the break-even point, which is your gross profit. From the example above, the break-even point is $15.
This is the formula for the break-even RoAS:
Break-even RoAS = Sale price/break-even point
= 50/15 = 3.33
This means that for every dollar you spend on Amazon advertising, you need to generate at least $3.33 in revenue to cover your costs and break even. A RoAS lower than 3.33 means your ads are not profitable.
Remember: A good RoAS varies depending on many factors (which we’ll discuss below), but any RoAS above the break-even point ensures your ads are contributing positively to your bottom line.
How to Determine Your Ideal RoAS
To determine your ideal Amazon advertising RoAS, start by calculating your break-even RoAS. This gives you the minimum RoAS needed to cover costs. Once you have this figure, decide on a satisfactory RoAS that is higher than your break-even point.
For example, if your break-even RoAS is 3, you might aim for an ideal RoAS number between 6 and 8 to ensure profitability and growth.
The determination of that ideal number depends on:
- The profit margin of your products
- The cost of goods
- Your advertising budget
- Your competition
Factors that Impact Amazon RoAS
As mentioned above, there’s a plethora of factors that impact your Amazon advertising RoAS.
We’ll mention four of them:
1. Product Profitability
Product profitability is crucial for determining a sustainable RoAS. Higher profitability allows more room for ad spend while maintaining a positive return. For example, if a leather purse has a profit margin of $20 and a kitchen slicer $4, the leather purse can afford higher ad costs and still achieve a good RoAS.
You can spend up to $5 on ads for a sale of the leather purse and still achieve a RoAS of 4. For the kitchen slicer, you can only spend $1 on Amazon advertising to earn the same RoAS.
2. Targeting Groups
Targeting type is an important part of your Amazon advertising optimization and affects your RoAS as well. This includes settings such as close match, loose match, substitutes, or complements in case of an automatic targeting campaign.
Generally, close match targeting records high RoAS numbers because your ads target the terms your customers would naturally type in the search bar when purchasing. But that’s not always the case. You can get better returns for other targeting groups, too.
We recommend having multiple ad campaigns with different targeting types to find the most profitable one and then doubling down on that.
3. Ad Quality & Type
High-quality ads with clear images, compelling copy, and effective calls to action can significantly increase conversions and, subsequently, your RoAS. For instance, a well-designed product image ad will attract more clicks than a basic, text-only ad.
There are 3 different ad types you can target:
- Sponsored Products
- Sponsored Brands
- Sponsored Display
Each of them are shown at different places in the Amazon marketplace and they can also impact your RoAS. Just like with targeting groups, experimenting with these ad types will help you determine which one rolls in the revenue for you.
4. Bidding Strategy
The foundation of effective Amazon PPC optimization is the bidding strategy, which is, in simple words, how much and in what way you spend money on Amazon ads. Smart bidding strategies can directly impact your RoAS as they affect both determinants of the calculation, i.e., revenue and ad spend.
You can choose between manual bidding, automated bidding, or enhanced cost-per-click to accelerate your sales.
IG PPC can help you ace all the factors (and more) mentioned above by streamlining your ad strategies for better conversion and RoAS. Book a free audit call with us today.
How to Increase RoAS on Amazon Ads
Selling on Amazon can be highly profitable if you can manage to improve your RoAS. Now, how do you do that exactly?
Here are some tips:
- Use negative keywords: These keywords help exclude irrelevant searches. This prevents wasted ad spend on clicks that are unlikely to convert.
- Monitor your performance: Monitor your Amazon ads and adjust the bids regularly based on which keywords and ads are performing the best. If you’re just starting out and don’t fully understand the ins and outs of Amazon advertising, consider using Amazon’s automatic bidding.
- Consider customers’ shopping behavior: People generally prefer to buy from their desktops rather than smartphones. This is more true when you’re selling high-ticket products. So, in that case, it’s better to bid down on mobile devices. Brook Hiddink, an Amazon expert, loves this tip.
- Use variable ad formats: Experiment with various ad formats, such as Sponsored Products, Sponsored Brands, and Sponsored Displays, and find the most effective options for reaching your target customers.
- Utilize Enhanced Brand Content (EBC): EBC allows you to create richer and more engaging product listings. By providing a better shopping experience and addressing customer pain points in the listing, EBC can increase conversion rates, which in turn improves the RoAS.
Frequently Asked Questions (FAQs)
Before we wrap up, let’s look at some of the popular questions about Amazon advertising RoAS:
ACOS vs. RoAS – What’s the Difference?
ACoS measures ad spend relative to sales revenue and is calculated as [(ad spend/sales) x 100].
RoAS, on the other hand, assesses revenue generated per dollar spent on ads and it is calculated as [revenue/ad spend]. Generally speaking, it’s better to have a lower ACoS and higher RoAS.
What is the Difference Between RoAS and ROI?
RoAS measures the revenue generated from advertising, while ROI assesses overall profitability, considering all costs and revenue.
RoAS is calculated as [revenue/ad spend] while ROI is calculated as [(net profit/total investment) x 100].
How Does Customer Lifetime Value (CLV) Impact RoAS?
CLV impacts RoAS by extending the revenue generated beyond initial purchases. Higher CLV means more long-term revenue per customer, allowing for higher ad spend while maintaining a profitable RoAS.
Conclusion
Amazon advertising RoAS is one of the most significant metrics of Amazon advertising. The higher it is compared to your break-even RoAS, the more profitable your ad campaigns are.
But you need proper strategizing and execution to make that happen. Don’t have the expertise for that? No worries. Book a free audit with us, and we’ll share a personalized PPC optimization strategy that will improve your campaign’s performance.
