ROAS is one of the best metrics for measuring Facebook ad success.
Everyone who’s familiar with growing eCommerce brands knows that.
But what’s not as obvious is what a good ROAS is for Facebook ads, and even fewer people know how to pick the right ROAS target for their brand.
Your first thought might be, “As high as possible. Duh.”
In some senses that’s right, and you should be shooting for the highest ROAS possible, but if you pick a target that’s too high, you can actually limit your growth rate.
If you don’t want to make that mistake, make sure you read the rest of this article to learn how to pick the right ROAS target for your eCommerce brand in order to maximize your growth and total sales.
Step 1: Profit Analysis
The first thing you need to know in order to pick the right ROAS target for your brand is what your break even and profitability numbers look like.
Essentially, you need to know all of the fixed costs for your products, including shipping, payment processing, etc., so you know when you are profitable and how much room you have to acquire new customers.
To do so, you’ll need to run the following numbers. (Send a message to firstname.lastname@example.org if you would like a spreadsheet you can use for this.)
- Average order value (AOV)
- Number of units per order
- Blended COGS Percentage (average cost of goods for your entire product line)
- Cost of goods per order (dollar value)
- Credit card fees (percentage)
- Merchant account fees (percent your eCommerce merchant takes per order)
- Shipping costs per order (on average)
- Fulfillment cost per order
- TOTAL COSTS TO FULFILL AVERAGE ORDER (sum of all the numbers above)
- Percentage COST (AOV divided by TOTAL COSTS TO FULFILL)
- Growth Fuel (AOV minus Fulfillment cost per order – this is how much room you have to fuel your growth)
- Target margin (How much you want to make on each order)
- Target net (AOV * Target Margin = Target Net $)
- CPA target (Growth Profit – Target Net = CPA Target)
- ROAS target (AOV/CPA = ROAS Target)
Step 2: Picking the Right ROAS Target
Now that we’ve taken some time to calculate your numbers to find out how much room you have to acquire customers for each product sold, we need to discuss something else—what’s your growth strategy?
You see, every business has a different answer when it comes to growth.
Smaller businesses have a smaller budget and less wiggle room when it comes to profitability, so their growth strategy is to grow while keeping as much profit as possible.
Bigger businesses that are funded by investors have more of a we need to grow as fast as possible mindset, which means they’re ready to be more aggressive with their growth and don’t need as much money to stay in their pockets.
Great examples of this are Amazon and Jet where they’ve yet to make a profit because they’re putting all of the money they make back into the company in order to fuel growth.
So in order to pick your ROAS target, you need to know your break even numbers, AND you need to ask yourself, “How fast are we looking to grow?”
Here’s why that matters…
If you’re looking to grow as fast as possible, and you set your ROAS target at a 5:1 return, then you’re going to slow your growth rate because the more you scale your ad spend, the more your ROAS is going to come down.
That’s a basic law of Facebook ads. As you scale spend and reach, your ROAS is going to come down.
But if you’re looking to grow as fast as possible, it’s OK for ROAS to come down as long as you’re still profitable.
You also need to consider that a 2.5 ROAS with $100,000 spent on ads ($250,000 in revenue) is better than a 5.0 ROAS with $10,000 spent on ads ($50,000 in revenue) .
Not to mention, you’re going to get more sales than what is tracked from Facebook ads.
For every purchase Facebook tracks, you’ll get another purchase from a friend who likes the shirt your customer just bought, another purchase when someone views your ad and tells a friend about your product even though they don’t purchase themselves, etc.
With this in mind, it’s important to remember that your goal isn’t just to get the highest ROAS possible on your ad spend but to profitably grow your eCommerce brand.
And in order to do that, you need to pick a ROAS target that a) is profitable but b) allows you to profitably fuel your growth and doesn’t hold you back.
At the end of the day, this is a complicated but important topic. If you pick a ROAS target that’s too low, you could end up going out of business, but if you pick a ROAS target that’s too high, you limit your business’s ability to grow.
Last but not least, you should also measure ad success by total dollars invested in ads and total dollars of revenue generated since not every sale is going to be tracked by Facebook. ROAS is a great metric, but it doesn’t capture every sale, which means you shouldn’t trust it 100% and can count on more sales coming in than are tracked in Facebook.
Leave a comment below to share your thoughts on how to pick the right ROAS target or if you have any questions about calculating yours.
And as always, get in touch if you’re interested in learning how ConversionEngine can help you pick the right ROAS target for your business AND fuel your store’s growth by running profitable and scalable Facebook eCommerce campaigns.