Understanding ROAS

Running ads across multiple channels extends your brand's reach and drives more conversions. But at what cost? And more importantly, is it even worth it? Not knowing the effectiveness of your advertising campaigns can lead to wasted dollars and keep you from achieving your business goals. But it doesn't have to be this way.

Every campaign needs ongoing monitoring and analysis to make sure it's working. One marketing metric you want to pay special attention to is your Return on Ad Spend (ROAS). Let's explore what it is, where to find it in RetentionX, and how it is calculated.

Why ROAS Matters

Imagine you are running campaigns on two different marketing channels, 'A' and 'B', each with its own set of costs and results. Channel 'A' brings in customers at a cost of $50 per customer, while channel 'B' costs more at $75 per customer. Customers from both channels spend $60 on their first order. At first glance, we'd agree that channel 'A' performs better because of its lower cost per customer acquisition - especially in terms of first order value. But the true measure of success goes beyond that. What if you discovered that customers acquired through channel 'A' tend to return their products rather than buy again? On the other hand, customers from channel 'B' continue to engage with your products over time and become loyal.

How to Calculate the ROAS

Most reporting only looks at the first order value to calculate the ROAS of your campaigns and channels. But let's face it, that's just window dressing. To understand what you're really getting out of an ad, you need to factor in the lifetime value (LTV) of your conversions. The ROAS calculation divides the LTV you generate from your ads by the amount you spend on your ad campaign.

Here’s the ROAS formula:

ROAS (%) = Customer Lifetime Value / Customer Acquisition Cost x 100

Here is a quick refresher on these two factors:

• LTV: Total Net Revenue - Cost of Goods Sold (COGS)
• CAC: Ad Spend / (Conversions * New Customer Share)

So if you spent $100 to acquire a new customer who contributes $300 in LTV, your ROAS is $300 / $100 = $3 or 300% return. For every $1 you invest, you get $3 in revenue (3:1 ratio). 

Hold on! Think about this: Is it fair to compare a newly launched campaign to an established evergreen campaign? Shouldn't we account for differences in customer lifetime value (LTV) between early and recent customers? Wouldn't more recent campaigns always show a lower ROAS? Absolutely! To overcome this, RetentionX breaks down your ROAS into milestones, focusing on LTV contributions within specific time periods, such as the first 3 months or first year. This normalization allows for fairer ROAS comparisons. RetentionX provides the following breakdown:

• ROAS 30 Days
• ROAS 90 Days
• ROAS 1 Year
• ROAS 2 Years
• ROAS 5 Years

Where to Find the ROAS

To boost your ROAS, it's crucial to ensure your ad campaigns effectively generate customer lifetime value while judiciously allocating your ad budget. Achieve this by experimenting with various ad types, targeting the appropriate audience, and fine-tuning your campaign settings. Constantly monitor your outcomes, analyzing successes and failures to refine your approach. The great news? RetentionX does the reporting this for you! We merge qualitative insights from UTM parameter tracking with quantitative data imported directly from platforms. Check out ROAS for Google, Meta, and TikTok in our Best Channels and Best Campaign reports.

What is a Good ROAS

Every D2C brand should aim for a 300% ROAS 1 Year - that's good. This means that for every $100 you spend, you generate $300 in LTV after your customer's first year. If you can get above 500% ROAS, we consider that excellent. A higher average ROAS means that you are generating more profit from your ads than you are spending on them. Conversely, a lower average ROAS indicates that you could be doing more to convert your ad spend into long-term profit.

Of course, average ROAS can vary widely depending on the type of product being sold, the target audience, and the competition. For example, fashion brands average about 180% ROAS after one year, while beauty & cosmetics brands average 220% ROAS after one year.

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