Amazon’s Return on Ad Spend has become a more crucial tool for optimizing advertising results as the company expands and grows. This article will provide an in-depth look at Amazon RoAS, including what it is, how to measure it, and best practices for handling it.
Furthermore, strategies for optimizing Amazon ad campaigns and tips for expanding advertising efficiency will be covered. You will have a comprehensive understanding of Amazon Advertising Spend and how to use it to maximize the returns on your advertising investments by the end of this article.
Understanding the Role of Return on Advertising Spend
Amazon’s Return on Ad Spend is a simple yet powerful metric to track your Amazon Ads performance. It shows how much money you can generate from each dollar spent on Amazon Ads.
It enables businesses to assess the effectiveness of advertising campaigns as well as the revenue generated by them. To calculate Amazon RoAS you need to divide your total revenue generated from Amazon Ads by the cost of those ads (in other words, ad spend).
What Makes a Good Amazon RoAS?
Every Amazon seller wishes to boost revenue as well as the visibility of their Amazon listing, and the best way to do so is to run a particular ad campaign. Amazon RoAS stands for Return on Advertising Spend, a metric that measures the return on your advertising investments. They measure the sales revenue for every dollar spent on ads.
Amazon RoAS helps advertisers evaluate how well their campaigns are performing, allowing them to make adjustments based on data-driven insights so they can achieve maximum returns or the target RoAS.
Calculating the RoAS can assist you with determining whether or not your ad campaign is effective. As stated by the Corporate Finance Institute, a RoAS of three or higher is generally considered good, indicating that you earn three dollars for every dollar spent on advertising but it is just the baseline for determining a good RoAS on Amazon since a higher RoAS is what you want to aim for.
However, a high RoAS does not immediately mean that your business is making money. You must still think about the following costs:
- Copywriting, graphic design, and other advertising necessities
- Listing enhancement
- Production and packaging
- Other essentials for advertising
You must guarantee that you are still making a decent profit after deducting all of the above costs. Otherwise, a high RoAS will be meaningless.
How is Amazon’s Return on Ad Spend calculated?
A simple formula is used to calculate RoAS. Simply devide your revenue by your advertising expenditure. The final figure is how much you earn per dollar spent on an advertising campaign.
Calculate RoAS in a few simple steps:
1. Calculate your total Amazon Ads revenue by adding up all sales from Amazon Ads.
2. Calculate your Amazon Ads cost by adding up all the money spent on Amazon Ads.
3. Divide the Amazon Ads revenue by Amazon Ads cost to get your Amazon ROAS.
To clarify things for you, here is the Amazon RoAS calculation formula you must use:
Revenue Dollars/Advertising Dollars = RoAS
Assume you earned $350,000 at the end of your campaign after spending approximately $185,000. With all these numbers, your RoAS must be calculated as follows:
RoAS = $350,000/$185,000
RoAS = 1.89
Following the statement that a good RoAS on Amazon should be at least three, it appears that your campaign is underperforming. Some sellers think that as long as your score is greater than one, you’re safe.
Related Source: What good RoAS is on Amazon?
How to Calculate Product Profit Margin and Break-Even RoAS?
Here’s the formula:
(Sales Value – Cost Involved) / Sales Value x 100 = Product Profit Margin
The product profit margin refers to the percentage of profit made on an item’s sale. For example, if you sell a product for $100 and your manufacturing costs are $40, your profit margin is 60% which is extremely high. Although the advisable profit margins vary by industry, 20% is considered a good profit margin.
Here’s the formula for Break-even RoAS:
RoAS Break-Even = 1 / Profit Margin
A break-even RoAS occurs when a brand’s advertising cost does not result in a profit or loss. In the preceding example, a profit margin of 60% has a break-even RoAS of 166%. To be financially viable in this scenario, the brand must start generating a RoAS of more than 166%.
Amazon Advertising Products with the Best RoAS
Amazon sellers who want to promote their listings on the platform can choose from three different ad types. These are some examples:
- Sponsored brands
- Sponsored products
- Sponsored display
Each of these advertising types works on a Pay Per Click (PPC) basis, which means that they use PPC ads to attract customers. According to a study of 3,500 Amazon sellers, Sponsored Brands produce the highest RoAS of any of the three categories.
Benefits of Utilizing Amazon RoAS
Here are the benefits of utilizing Amazon RoAS, such as:
- It provides an easy and quick way to measure the effectiveness of Amazon Ads.
- It allows advertisers to quickly gauge their performance and make adjustments if needed.
- It helps determine if money is being spent efficiently or not.
- It gives insight into what strategies are working and which ones need to be improved or abandoned.
- It gives a comprehensive overview of the performance of Amazon Ads, allowing for more informed decisions.
Return on Ad Spend Constraints
RoAS can be misleading as it depends on the goals of advertising campaigns, conversion factors, and spending. The RoAS is only calculated with the cost of advertising in mind, so other factors can affect profits. Average RoAS varies from medium to medium, so it is important to compare campaigns.
Not all forms of advertisement are easy to assess individually, making it difficult to track the effectiveness of online or email advertisements. For example, it is difficult to determine how many people bought a product based on a billboard on the highway.
Return on Advertising Spend By Targeting Type
The targeting you choose for your campaigns can have a significant impact on your RoAS. It is important to take the time to figure out which works best for your business, as specific ad types will have different targeting options. With enough trial and error, you will be able to determine what works best for you since a good RoAS on Amazon can vary depending on the ad targeting type.
For example, Amazon recommends using broad targeting for Sponsored Products and Amazon Display Ads as they are more likely to reach a larger audience while being cost-efficient.
On the other hand, Amazon recommends using exact match or phrase match for Sponsored Brands as they tend to generate higher RoAS. Amazon suggests testing different types of targeting to see which ones generate the highest and most cost-effective RoAS.
Return on Advertising Spend By Product Price
The Amazon RoAS also heavily depends on the price of the product. Amazon typically recommends that you aim for a higher RoAS when advertising products with a lower price point, as they usually have higher competition and a high cost per click.
Products within the $21 to $30 price range tend to yield the best returns on ad spending.
This is because customers are more likely to purchase something within this price range. After all, it isn’t too expensive and fits almost everyone’s budget. Instead of focusing on high-ticket items, consider high-value offers that will draw in customers. Advertising products under $21 may hurt your profit margin more than help it, even if your RoAS looks high.
On the other hand, Amazon suggests aiming for lower RoAS when promoting expensive items since they typically have less competition and a lower cost per click. Amazon recommends that you experiment with different RoAS targets based on the product price to see which works best for your business.
How to Find Your Minimum RoAS
Finding your minimum RoAS is as simple as finding your break-even point. Once you have your break-even point, it’s as simple as following this formula:
Sale price / break-even RoAS = Minimum RoAS
Let’s take a look at the example below to see how it works.
Assume you have a product that sells for $35 and has an $8 break-even RoAS. To calculate your minimum RoAS, divide your selling price by the break-even RoAS.
In this case, the answer is 4.38. That is, you’d need to generate $4.38 for every dollar spent on advertising to ensure you’re still profitable and not just breaking even.
Related Source: What’s a Good Amazon RoAS?
Best Practices For Amazon Return on Advertising Spend
Here are a few simple yet highly effective practices to increase your RoAS to ensure you’re getting the most out of your Amazon ads:
Concentrate On Less Competitive Search Terms
Paid advertisement avenues are built around a bidding system that drives up the price of in-demand search terms, so sellers must be creative and search for long-tail keywords to lower the cost of their ads and increase RoAS.
Utilize Data From Automated And Manual Campaigns
When creating an ad campaign, there are two primary campaigns:
- Auto-targeting campaigns rely on Amazon algorithms to select keywords for products.
- Manual targeting limits control over search terms.
Amazon offers three bidding strategies for manual targeting:
- Broad match bidding is where you are placed in an auction for any number of keyword phrases that are vaguely related to the see phrase you begin with.
- Phrase match bidding is similar but considers word order when determining which search terms your ads will appear for.
- Exact match bidding allows you to bid on only the keywords and phrases you specify.
We recommend combining studies from auto-targeting campaigns and manual broad match bidding campaigns to identify the keyword phrases that produce the most profitable outcomes to maximize your ROAS and optimize your Amazon advertising strategy.
Boost Your Average Order Value.
Creating a pay-per-click (PPC) ad campaign means that you will be charged every time someone clicks on your ad regardless of whether or not they end up purchasing your product. The goal is to generate enough sales that you earn more in profits than you are spending on the campaign, but this can be difficult if the price of your products is low.
To increase your average order value (AOV) without having to raise the prices of your products, bundle products together and advertise the bundle. Upsell customers to a more expensive variation of your product by advertising the base product before giving customers the option to upgrade by clicking through the product detail page.
Tips to Improve your Amazon Advertising Spend
A low RoAS does not automatically imply that your ad or marketing campaign was a complete failure and that you must start over. Your campaign (or website or product) may only require minor adjustments.
Here are some tips to help you improve your RoAS:
Improve Your Keywords
The most important details are that it is important to focus on specific search terms relevant to your brand.
Reduce the Cost of Ad Development
RoAS should be used to eliminate campaigns that are not generating enough revenue. Refining keywords and target audiences can save money by funneling cash to keywords that are more likely to rank and convert.
Negative keywords should be added to ads to exclude search terms, and PPC campaigns should be run with a budget to support click-throughs.
Examine Issues Unrelated to Your Ads
Low RoAS is not always a sign of a failed campaign, as it can indicate an issue outside of the ad strategy. If RoAS is low, but conversion rates are high, it could be your product is priced too low. If click-throughs are high, but conversions are low, you may have priced your product too high. If users are abandoning their shopping carts, your descriptions on the page could be making the purchasing process confusing. In that case, it’s time to rethink your listing quality.
Amazon ROAS is a powerful measuring tool that can be used to maximize your advertising results. To reach the best possible Amazon ROAS, sellers should focus on less competitive search terms and make use of audience targeting.
Additionally, it is important to experiment with ad positioning, refine keywords and reduce the cost of ad development.
With these strategies and tips, Amazon sellers will be able to optimize their Amazon advertising campaigns and maximize their Return on Advertising Spend.
Frequently Asked Questions
Q: What is Amazon RoAS?
A: Return on Advertising Spend is a powerful tool that allows Amazon sellers to measure the effectiveness of their Amazon Ads. It helps determine if money is being spent efficiently or not, and gives insight into what strategies are working and which ones need to be improved or abandoned.
Q: What Amazon ad types are available?
A: Amazon sellers who want to promote their listings on the platform can choose from three different ad types. These are some examples: Sponsored brands, sponsored products, and sponsored displays. Each of these advertising types works on a Pay Per Click (PPC) basis and uses PPC ads to attract customers.
Q: What is an Amazon RoAS goal?
A: Amazon typically recommends that sellers aim for a higher RoAS when advertising products with a lower price point, and aim for a lower RoAS when promoting expensive items. Amazon also suggests experimenting with different RoAS targets based on the product price to see which works best for your business.