Return on Advertising Spend (RoAS) measures the effectiveness of your digital advertising campaign. It’s a benchmark measure to help retailers evaluate which ad methods are working and how they can improve future advertising efforts. Amazon took this idea from Google Ads which uses Return on Ad Spend (ROAS) and created ACoS (Advertising Cost of Sale) — the inverse of RoAS.
According to research by Ad Badger, paid search conversion rates on Google are around the eCommerce site average of 2%. On Amazon, their users saw an average conversion rate of about 9.5% for Sponsored Product Ads. Combined with the fact that Amazon remains the single largest eCommerce platform, optimizing your presence on Amazon is critical to your eCommerce success.
There are a lot of ways to ‘win’ on Amazon, but paid search and display ads have their role in any Amazon campaign. That means you need to understand and benchmark your RoAS — let’s get started.
How do you calculate RoAS and how is it different from ACoS?
Let’s take an example.
If you generate $1,000 in sales from $250 of ad spend, that would be a return on ad spend of 4x (or 400%). If you have $250 ad spend and revenue of $1,000, then your ACoS would be 25%. A RoAS of 4x is an ACoS of 25%
Why are there different terms for the same thing? The answer comes down to priorities. Marketing professionals tend to focus on RoAS as a metric because it shows the efficacy of ad spend. It also allows for easier comparisons to other parts of marketing, since this is a standard marketing metric.
ACoS is rarely used outside of Amazon search advertising. What ACoS does deliver, however, is a very straight-forward way of gauging the profitability of a campaign. For example, if our target profit margin was 30%, and 25% of that margin was spent on advertising, it’s a lot easier to grasp what that means rather than saying that we got a 4x return on ad spend.
This may all be important context to understanding what the reporting metrics coming from Amazon actually mean. However, it doesn’t answer the question — what is a good RoAS on Amazon?
What is a good RoAS?
All businesses have a target on how much of their profit they want to spend per sale on ads. You need to make this decision for your own business.
The average RoAS on Amazon is around 3x. This will change based on your industry, strategies and goals. For example, Consumer Electronics has a RoAS of around 9x whereas Toys and Games have a RoAS of around 4.5x.
These averages, however, conceal some other differences. For example, auto campaigns and broad match/phrase match bidding strategies will have a lower RoAS compared to a diligently targeted exact match campaign. It also depends on where your product is within its lifecycle and the amount of competition in the market. Particularly when it comes to highly-competitive markets, you will simply have to allow for higher ad spends in order to win bids.
As a rule of thumb, a RoAS of around 6x is a good starting point — or an ACoS of 16.6%. But this is a very vague benchmark that you need to review within the specific context of your ad campaign.
Is a high RoAS always good?
Generally, sellers believe having a high RoAS is what they should aim for. However, it depends on what your strategy is for selling a product.
Setting a high RoAS target is a good strategy for selling a low-converting product, or for a product that doesn’t require high visibility.
Low RoAS delivers high visibility. Setting a low target RoAS works when you’re trying to move low-selling stock, or you want to increase brand awareness or dominate a niche. Basically, you’re committing a large amount of ad spend to get a high chance of return.
Find your RoAS balance
It’s important that you find a balance. You don’t want to spend too little to advertise your products and not get enough exposure. On the other hand, you don’t want to spend too much and narrow your profit margin.
One lever you can set is a minimum RoAS (or maximum ACOS). This is the break-even point. The point where you’ll start losing or making money as a result of your ad spend.
Savvy Amazon sellers use different target RoAS for different types of products to maximize their selling potential. While having a high RoAS is great for profitability, a low RoAS can increase visibility, dominate a niche, and lead to more profit in the long run.
A “good” RoAS is governed by your strategy — but it can always be optimized.
Once you have decided on your strategy for each product — volume/growth-based or efficiency/ROI-based — you can begin to group your campaigns.
Products can be grouped around target RoAS figures, and then grouped further into ad groups. If you have a large product portfolio, this can be onerous to set up and maintain. Software tools can help automate segments of this process. It’s also worth considering investing in analytics tools that can help you understand your Amazon customer data, freeing time to then effectively take action on those insights — like optimizing the structure of your ad campaigns. Regardless, once you have your groups, there are four main tactics for increasing your RoAS:
Focus on the right keywords
By choosing the right keywords, you’ll attract more leads through your sponsored content. This will lead to more conversions for your business, and decrease the amount of money you have to spend to attract leads. The first step is to conduct keyword research using an Amazon-specific keyword tool.
Optimize page content
When you drive leads to your page, you must provide information that is relevant. If someone searched “flashing holiday tie”, your listing should contain information that’s relevant to flashing holiday ties. If your product is relevant and at a good price point, you’ll get conversions.
Optimize your titles
The title should focus on your keywords and relevant information. If someone is searching for your ties, information about the material and patterns would be something you could add to the title.
Set the right bid amount
Take the average order value, multiply it by the conversion rate and divide it by the target RoAS. In the case of our ties (somewhere between apparel and gifts — this would be about 7.5x RoAS or 12.5% ACoS). This will give your estimated bid amount.
To deliver your target RoAS across all your products, your PPC campaign management will require frequent attention to ensure you’re maximizing your ad spend. This will include reviewing negative keywords, bids, ad placement, campaign types, and verifying what your target RoAS really should be — moving as many levers as possible to maximum effect. The scale of this task is best carried out with data analytics tools and automation, making the most of machine learning and AI.
Keeping on track
Once you have defined and implemented your basic tactics, analysis tools are brought to bear to optimize your campaigns and increase, or decrease, your RoAS depending on your strategy.
There are several areas where analysis can really make your campaigns fly.
Analysis of search term conversion
This focuses on already-converting search terms that have the potential to get more sales. Amazon offers four levels of match: Auto, Broad, Phrase and Exact. One way of achieving better conversion rates is to consider migrating some of the search terms to an “exact” match.
Broad and Phrase match keywords can be considered as being put in a bucket of search terms, giving potentially thousands of results for off-topic items. If you target a broad or phrase match keyword, you can only set one bid for that keyword. Amazon then applies that bid to the entire bucket of search terms that match to it.
For example, if you’re bidding on “holiday tie” as a broad/phrase match keyword, Amazon might show your product to someone searching for “holiday tie dye shirts” — which would not result in sales, as it’s completely different from what you’re selling.
Rather than just manage keyword bids and match types, search term optimization is a technique that focuses on the actual search terms that drive sales, isolating them to enable precision bid management.
This is a three-step process. Your analysis software seeks out your search terms that have at least one sale. It then moves these converting search terms into specific campaigns as an Exact Match keyword. It will then negate the same converting search term from all other campaigns. This means you are bidding on this search term specifically, rather than trying to set a bid on a bucket of search terms.
Budget efficiency rating
Software driven by AI and machine learning is well placed to analyze whether you are making the most of your allocated daily budget. If you’re underspending, you could be missing out on incremental sales opportunities. As a starter, if you have spent your daily budget, 80% of the time you are in a good position — and can dive deeper to work out how to make it better.
Value of the search term
You always want to investigate the value of search terms before committing your budget. This is also critical to setting realistic RoAS/ACoS goals. For example, branded vs non-branded search terms make a big difference. If you are targeting your competitor brands specifically on their ‘branded search’, you can effectively siphon traffic towards your listings. However, you should expect a lower conversion rate, and, therefore, lower RoAS.
The other main factor to consider when looking at search term value is the volume of traffic. This has a big impact on the number of sales your ad-buy is likely to generate. However, high traffic terms are also likely higher competition. That means higher bids and lower RoAS.
Don’t forget Customer Lifetime Value (CLV)
While RoAS is important, it’s important to not lose perspective of the bigger picture. CLV (customer lifetime value) is the real figure dictating the profitability of different investments. For example, if your customers regularly re-convert, steadily buying your products for years, taking a loss to get that ‘first sale’ is a financially wise decision.
For many businesses, eCommerce businesses specifically, customer acquisition is a lot more expensive than customer retention. If you are willing to get creative and long-term with how you think about PPC ads, it opens up possibilities to new ways to dominate your niche.
CLV is another avenue in which data analytics tools can help. By crushing customer data, a good analytics tool can tell you the average CLV centered on different product lines, customer personas and buying patterns. Together, this information can tell you which products tend to generate loyal customers, allowing you to think more strategically about your ad spend and ideal RoAS.
Knowing the CLV of a customer helps you to strike a balance between customer retention and acquisition — and ensures you’re putting your RoAS measures to best effect. Knowing at what point a customer becomes profitable is an essential part of knowing how much advertising budget you can allocate to a particular product, channel or market.