Understanding ROAS

[Mcdougal]

Hi there, all fellow business owners.

Can someone please help me understand ROAS.

I’ve only just started selling my imported product on Amazon it is going well but I am struggling to understand my ROAS:

Sounds simple, but the ROAS on Amazon dashboard doesn’t give me any idea how to work it out:

For example:

My product cost for this product is £7.75, I sell on Amazon for £24.99 (after costs from Amazon etc)

My Amazon dashboard shows this currently:

Sales £473.72
Ad spend £366.49

To get my profit figure should I be working out cost price and then sales excluding VAT etc?

Struggling to work it out.

 

[japancool]

Well, first of all, are you VAT registered?

You say 24.99 is after costs from Amazon. So what are you actually selling for? If the 473.72 sales is net of Amazon costs, then you've sold 18.95 units.

Judging by the raw figures, you've made a loss.

 

[Mcdougal]

Well, first of all, are you VAT registered?

You say 24.99 is after costs from Amazon. So what are you actually selling for? If the 473.72 sales is net of Amazon costs, then you've sold 18.95 units.

Judging by the raw figures, you've made a loss.

Hello, no not VAT registered.

As I’m having a hard time understanding the formula.

Just to clarify product cost is £7.75 landed for me to buy and my net profit product margin is £17.24 @ £24.99.

 

[japancool]

Hello, no not VAT registered.

As I’m having a hard time understanding the formula.

Just to clarify product cost is £7.75 landed for me to buy and my net profit product margin is £17.24 @ £24.99.

Then (net profit margin per unit x sales) - ad spend = profit.

 

[Mcdougal]

Then (net profit margin per unit x sales) - ad spend = profit.

I need to adapt my advertising better I think.

 

[japancool]

So currently am I making losses?

Yes.

I'm assuming £7.75 cost is AFTER you've paid import VAT and duty (if applicable)?

What is your actual sale cost on Amazon? And how much (in %) is the Amazon fee per item?

 

[Mcdougal]

Yes.

I'm assuming £7.75 cost is AFTER you've paid import VAT and duty (if applicable)?

What is your actual sale cost on Amazon? And how much (in %) is the Amazon fee per item?

That is correct yes, after paying VAT and import duty etc.

The actual retail cost is £27.60 - I’m working out my costs after that etc

What is confusing me is ROAS shows 1.29

 

[japancool]

Return on ad spend (ROAS)

Return on ad spend (ROAS) is a measurement of revenue earned for every marketing dollar spent on advertising.

www.singular.net

That assumes that ALL your revenue is coming from your ads.

 

[Mcdougal]

Hi there, the beauty with Amazon is, we are also getting organic sales on the back of it because our product ranking is good when we get sales etc. However making a loss, on the basis. Isn’t good and I think I need to adapt my stragety better. I’m extremely new to advertising so learning it as I go.

 

[japancool]

473.72 / 27.6 = 17.16 units sold.

Does that 473.72 include postage costs?

 

[Mcdougal]

473.72 / 27.6 = 17.16 units sold.

Does that 473.72 include postage costs?

Yes

 

[Elliott Coleman]

Your ROAS of 1.29 just means that your revenue was 1.29 times that of your ad spend £366 x 1.29 = £472.

It looks great on the surface but your costs have not been taken into account so in reality you have made a loss.

What you need to do is work out what ROAS you need in order to make a profit.

So a quick back of a fag packet calculation says you have sold approx. 19 units the cost of which was £147.25 leaving you with £327.56 profit.

In order to break even you need a ROAS of approx 1.45 (£327 x 1.45 = £474.15)

 

[apricot]

Roas calculation is : Sales / Ads spent

Sales £473.72
Ad spend £366.49


473.72/366.49= 1.29

If the Roas is highher than your ads are doing fine but if it is small number than not doing well. 1.29 is not doing well. You need to optimise the campaign.

 

[AlanJ1]

Your ROAS of 1.29 just means that your revenue was 1.29 times that of your ad spend £366 x 1.29 = £472.

It looks great on the surface but your costs have not been taken into account so in reality you have made a loss.

What you need to do is work out what ROAS you need in order to make a profit.

So a quick back of a fag packet calculation says you have sold approx. 19 units the cost of which was £147.25 leaving you with £327.56 profit.

In order to break even you need a ROAS of approx 1.45 (£327 x 1.45 = £474.15)

On the face of it yes, but factor in (most likely) a 15.2% fee for Amazon and the postage cost (be it FBA or a courier cost) this would still be a major loss.

We run our ads based on total ROAS for the whole of our Amazon account, ads increase our ranking which increases non-ad sales.

Typically we are looking at 5+ (it is product dependent) for our items to be at a profitable level (on an account level) for us to be happy.

Lots of exemptions to this, we had a couple of great products that sell in December time and will sell 10,000+ units so pushing ads very early to get the ranking helps so we take a hit on those a little more to start with and then scale back.

 

[Elliott Coleman]

On the face of it yes, but factor in (most likely) a 15.2% fee for Amazon and the postage cost (be it FBA or a courier cost) this would still be a major loss.

I'm pretty sure that's what I said.

 

[AlanJ1]

I'm pretty sure that's what I said.

I don't think you did.

You said he needs a ROAS of 1.45 to break even and it will be nowhere near that. It will be much higher.

Turnover was correct as you stated at £472.
Amazon fees on £472 is £72.

Leaves £400. Ad spend was £366, leaves £34.

Got to ship the product and the cost of the product itself?

This is forgetting any VAT elements if you are VAT registered (which I don't think you are from brief conversation OP).

 

[Fagin2021]

Not a fan of ROAS. It might be useful when the same company is comparing advertising across different channels but, as others have pointed out and unlike ROI, it doesn't take into account the cost of sale.

Google and others may boast that "Fred gets $2 in revenue for every $1 he spends on advertising" but unless you're selling subscriptions or pornography that likely represents a loss.

People have different definitions of ROAS. For example, some include all advertising costs (like agency fees) in the calculation. Others don't.

A typical retailer or manufacturer needs a ROAS of at least 3 to break even and 5+ to make any money.