While Amazon’s success as an accessible selling platform has skyrocketed and continues to evolve over time, there are a number of key metrics that remain relevant and integral to Sellers looking for growth opportunities. We’ve previously seen the integration of the RoAS (Return on Advertising Spend) metric into the Campaign Manager of the Amazon advertising console. This is one important metric that provides a simple yet robust gauge of ad campaign performance.
Whilst some Sellers recognized RoAS from their downloadable reports, its incorporation into Campaign Manager provided another way for brands to analyze ad spend, ad revenue, and overall ad performance. Since RoAS is ubiquitous across the marketing and advertising world, it also allows Sellers to benchmark the performance of their Amazon ad campaigns against other sales channels.
RoAS appears in all ad campaign types, including:
- Sponsored Products
- Sponsored Brands
- Sponsored Display Ads
RoAS allows Sellers to garner insights from ad performance and revenue without having to do any manual calculations, but to derive any real value from it, you’ll need to know your break-even point.
Only then can RoAS provide insight into how successful your ad campaigns are when profit margins are factored into the calculation. To help you out, we’ve come up with the following guide to utilizing RoAS in the context of your break-even point. Let’s begin.
Suggested reading: To learn more on what the ideal RoAS looks like for a Seller, check out our article — What's a good RoAS on Amazon?
ACoS vs RoAS
Amazon ACoS (Advertising Cost of Sale) predated RoAS by many years, but really, RoAS and ACoS are just the inverse of each other. RoAS determines the revenue return on every dollar spent on advertising and ACoS determines advertising spend for every dollar revenue returned in sales. ACoS better describes cost whereas RoAS better describes return.
- Ad Spend/Ad Revenue = ACoS expressed as a percentage
- Ad Revenue/Ad Spend = RoAS expressed as a whole number or a percentage
RoAS is probably the more intuitive of the two metrics and is more widely used across the marketing and advertising world (including in Google Ads).
For example, spending $100 on ads to return $500 in revenue would result in an ACoS of 20% and a RoAS of $5 (or 5x, aka 500%). Increase that to $600 in revenue and the ACoS decreases to approximately 16.6% whereas the RoAS simply increases to $6, $6 of revenue for every $1 spent on advertising.
How to calculate RoAS
Amazon calculates the RoAS of your campaigns for you, but some level of theoretical understanding is essential.
At its most basic, Ad Revenue/Ad Spend = RoAS
The advanced calculation is (Average Order Value x Conversion Rate) / CPC = RoAS
For example, if you have an average order value (AOV) of $15.00 and your conversion rate (CVR) is right on the Amazon average at 9.55% with an Amazon average CPC of $0.71, that means that your RoAS is (15 x 9.55)/0.71 = 201, or about $2.
Now, if your goods cost literally nothing to sell and advertising was your only cost (which is impossible), then a RoAS of $2 represents a $2 return on average for every $1 spent on advertising—you’re essentially doubling the money you spend on ads.
But, if your pre-advertising profit was just 20% (a margin of $3 per $15 AOV), then the RoAS shrinks to $0.4, or 40%. This means that you’re only returning $0.40 for every $1 spent on advertising—a 60% loss!
This is why RoAS without a profit margin or the break-even point is practically useless unless your products are made from thin air and you’re paying no Amazon fees!
What is break-even RoAS?
RoAS, like ACoS, only provides insight into revenue vs ad spend. Revenue is not an indication of profit. Sure, you might be returning a healthy-looking RoAS on your ad campaign and bringing in a lot of revenue, but how do you really know that it’s profitable unless you know your profit margin and break-even point?
It’s only when you know your profit margin and break-even point that you can truly understand your Amazon RoAS. If you have a high profit margin then you can likely afford to spend more on advertising to increase revenue or lower your product costs to attract more buyers. Whereas if you have a low profit margin then you’ll likely have less wiggle room to turn a profit after ad costs, but also might be benefiting from increased revenue and increases in organic ranking.
To work out your break-even point, you’ll need 2 data points:
- Revenue: Your gross income.
- Cost of goods sold (COGS): All costs associated with purchasing products and preparing them for retail on Amazon, including Amazon fees, storage, fulfillment and FBA, taxes, etc.
Here is a simple example:
Product sale price: $40
COGS including Amazon fees: $20
$40 - $20 = $20 profit, which is a 50% profit margin (profit margin = profit/revenue). Note that to work out break-even ACoS, the ACoS simply cannot exceed this profit margin percentage for the campaign to remain profitable.
This $20 profit margin is pre-advertising cost, or in other words, it’s the profit you’d receive after making an organic sale without spending a dime on advertising. This is your break-even point—spend that full $20 profit on advertising you’ll only break-even and make no gross profit after advertising.
Bringing this back to RoAS, it’s necessary to calculate RoAS with your break-even point to discover your minimum RoAS, which is essentially the most you can spend on advertising whilst still turning a profit or breaking even.
Use the following calculation:
Product sale price/break-even point = minimum RoAS
So, for the above example, $40/$20 = $2 minimum RoAS.
Now you have a minimum RoAS of $2, it’s just a matter of comparing the actual RoAS figure vs the minimum RoAS to gauge the true profitability of a campaign. In this case:
- A RoAS of higher than $2 means that your ad campaign is profitable after all costs are taken into account.
- A RoAS of lower than $2 means that your ad campaign is not profitable and loss-making after all costs are taken into account.
- A RoAS of $2 exactly means that you’re merely breaking even after advertising after all costs are taken into account.
What to do with your break-even RoAS
Amazon RoAS is a simple but robust measure of advertising campaigns and can be compared across campaigns, not only internally within Amazon, but across other selling platforms too.
Once you have your break-even RoAS for a particular product or campaign, it’s possible to work out whether or not you’re profiting from the campaign after COGs are taken into account.
A high RoAS (e.g. $5) after calculating your break-even might reveal that you have more wiggle room on your ad spend, allowing you to beat competitors by lowering your product prices or increase ad spend to increase revenue.
A low RoAS (e.g. <$1.5) relative to break-even indicates that you might need to tweak your campaign or pause it completely if you’re running at an irrecoverable loss. But, there are situations when a low RoAS is absolutely fine or even preferable, and hovering around break-even is a strategic choice under the right circumstances.
For example, borderline profitable (or even unprofitable) RoAS scores can drive significant traffic to a listing, boosting its position in the rankings and increasing exposure. Another situation where a low RoAS is strategically beneficial is when ads increase customer lifetime value (CLV) by driving multiple and repeat purchases as well as cross-selling. Paying more for ads that drive sales and boost organic rankings also justifies a lower RoAS.
A lower RoAS campaign that results in significant sales is better than a high RoAS campaign which yields comparatively fewer sales, especially if the former also drives cross-selling and repurchasing.
Pro tip: Our blog on 5 Tips to Improve Your Amazon RoAS has even more helpful insight on how to better your RoAS.
How CLV interacts with RoAS
At its most basic, a profitable RoAS is one that exceeds pre-advertising profits, but this is still a rather linear model which doesn’t accurately describe the realities of repeat orders.
Namely, RoAS really describes how advertising costs relate to a single purchase — it’s a short-term or transient measure that doesn’t factor in customer lifetime value (CLV).
CLV is a familiar concept across marketing and advertising and refers to how much value a customer yields to a business or brand over their multiple purchases with said brand. Think of Amazon itself, which retains some 90% of its customers. Given that every customer that Amazon requires has a 9/10 chance of becoming a repeat buyer (likely for many years), it makes sense for them to spend more on acquiring that first sale, as that first sale is likely to lead to another, and another, and so on and so forth.
It costs as much as five times more to acquire a customer than it does to retain them for future purchases — front-loading acquisition costs to bring RoAS closer to the break-even point (or even below it) is an excellent way to fuel profitable long-term relationships with customers, in the right circumstances. Where repeat purchases and cross-selling are most likely, running lower RoAS ad campaigns is a wise strategic choice. The inverse is also true — where repeat purchases are unlikely, it’s shrewd to keep RoAS high.
This is why CLV should change a savvy Amazon Seller’s perception of RoAS. Judging RoAS in relation to a singular customer-sale relationship and not paying attention to CLV is a missed opportunity in bettering your ACoS. For example, say an ad spend is $10 and a single ad sale is $20. If that customer makes the same purchase 3 more times over the course of the year, then the ad sale increases to $80 while the ad spend remains at $10. That takes the true ACoS for that particular ad from 50% to 12.5%, all through paying more attention to CLV.
Suggested reading: If you’re still unsure about the basics of Customer Lifetime Value, feel free to get a recap with our starter guide on CLV and CAC — An Introduction To CLV And CAC On Amazon
Calculating your CLV-adjusted break-even RoAS
Raw RoAS provides a useful short-term metric, but when combined with CLV, it can provide a much more detailed description of longer-term sales trajectories. Brands can afford to reduce their RoAS if this produces favorable downstream results in the form of cross-selling and repurchasing.
CLV is typically calculated monthly, quarterly, or annually: CLV = average order value x number of orders x retention period.
A key factor of a customer’s CLV is that it changes over time. The end goal is to be able to accurately track that change and see how you can improve it in the long run with the information you have. If you acquire that customer through an ad, they aren’t just worth the value of that single sale but the forthcoming sales too.
Nozzle realized the value of factoring CLV into marketing and advertising campaigns and built our analytics tool around leveraging CLV and customer acquisition cost (CAC). CLV is the missing link in Amazon analytics that enables Sellers to plan for real customer relationships that unfold over months and years rather than just a single sale.
Going forward: understand the true value of your customers
CLV is the missing piece of the savvy Amazon Seller’s toolkit — and Nozzle provides that missing piece to help brands unlock newfound potential and success in selling on Amazon. Building a strong perception of buying trajectories allows brands to contextualize their RoAS and ACoS metrics in the long term.
Our Customer Lifetime Value tools enable brands to:
- Adjust their CPC bids to cater for long-term CLV, unlocking opportunities to outbid competitors for the sake of long-term profit.
- Double-down on advertising campaigns that drive multiple purchases, repeat buying or cross-selling, even when initial RoAS does not seem favorable.
- Discover high-CLV customers that drive future purchases and develop personas to tailor marketing and advertising strategies.
- Develop strategies for dominating a niche or increasing market share.
Start your free Nozzle trial today to unlock the potential of CLV and the game-changing impact it can have on your marketing and advertising strategy.