University - Amazon Advertising
Understanding Your Amazon RoAS
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Return on advertising spend (RoAS) is a metric that brands and retailers use to measure the effectiveness of their advertising campaigns. RoAS helps businesses determine exactly how much revenue they generated or if they produced revenue from their advertising investment. The amount calculated for each campaign serves as a benchmark that brands reference to detect if a campaign is performing well or if it requires a new approach.
Even though Amazon uses advertising cost of sale (ACoS) as a key metric on its PPC campaign platform instead of RoAS, brands should calculate RoAS to measure their success from a different viewpoint.
How to Calculate RoAS
RoAS = Revenue from Ad Spend / Cost of Ad Spend
As displayed above, brands and retailers are able to calculate their RoAS by dividing the revenue from their advertising spend by the cost of their advertising spend. The amount will reveal if a brand’s advertising effort is profitable.
For example, if you spend $2,000 on an advertising campaign and it produced $8,000 in revenue for that month, your RoAS would be 4x. The 4x figure (also referred to as $4 or 400%) represents a 4:1 ratio, meaning that every dollar a brand allocates to their advertising campaign generates $4 in revenue.
RoAS and ACoS are metrics that are used to help brands and retailers measure the return on their advertising initiatives.
ACoS = Ad Spend / Ad Revenue x 100
The RoAS and ACoS formula is inverted, as each measurement is calculated based on a brand’s priority. RoAS demonstrates how much revenue a brand made from their advertising spend, whereas ACoS reveals the percentage of how much the advertising spend contributed to the revenue produced.
To clarify the differences further, it is worth referencing the previous example. Spending $2,000 on an advertising campaign that generated $8,000 in revenue has a RoAS of 4x ($4 or 400%). Plugging in these numbers to the ACoS formula ($2,000 / $8,000 x 100) results in 25%. Ultimately, a RoAS of 4x is an ACoS of 25%.
What Is Considered a Good RoAS?
A good RoAS will vary depending on your business goals and industry. For example, a great RoAS for the Toys and Games category is 4.5x while Consumer Electronics is in good standing with a RoAS of 9x. Brands who use Amazon Advertising can refer to the retailer’s category benchmark downloadable report for greater insight.
As mentioned, achieving a good RoAS will be different for every brand depending on your goals and how competitive your industry is. Small to medium-sized businesses that want to increase their brand and product discoverability will usually have a low target RoAS, as they will need to invest significantly in advertising to reach more audiences. Brands that are in a highly competitive industry, such as online grocery, will also have a low target RoAS.
In contrast, major retailers will likely have a high target RoAS. A high target RoAS is a good strategy for businesses that are well-known and want to increase their sales. This is a bottom-of-the-funnel approach that is solely focused on maximizing profitability. Retailers with a high-target RoAS would benefit from creating advertising campaigns for products that consumers may not re-purchase on a frequent basis to drive conversions.
A brand’s and retailer’s RoAS is also impacted by different factors, such as profit margins, operating expenses, and overall business health. Businesses with large margins are able to survive a low RoAS, whereas low margins will prompt brands to reduce their advertising investment. Smaller businesses are able to grow their brand with a low RoAS by increasing awareness but they will not be able to maintain the same low rate for a long period of time.
How to Calculate Product Profit Margin and Break-Even RoAS
Product Profit Margin = ((Sales Value – Cost Involved) / Sales Value) x 100
The product profit margin is the percentage of profit made from the sale of an item. For example, if you sold a product for $100 and the costs involved with producing the unit is $40, then your profit margin is 60%. A profit margin of 60% is very high. Although the ideal profit margin varies by industry, the standard benchmark for a good profit margin is 20%.
Break-Even RoAS = 1 / Profit Margin
A break-even RoAS is when a brand does not gain or lose money from its advertising spend. Referencing the example above, a profit margin of 60% has a break-even RoAS of 166%. In this scenario, the brand must generate a RoAS of more than 166% to be profitable.