Calculating ROAS, ROI & The Attribution Question
If you have an online business, you’re probably familiar with the terms ROAS and ROI. But getting an accurate calculation of these two metrics is a little bit more complicated than what they appear at face value. There are several variables that each business owner needs to take into account when calculating ROAS and ROI, like the different advertising platforms used, and the typical consumer journey of their customers. But before we get into that, let’s just do a basic overview of how ROAS and ROI are calculated.
ROAS, or Return on Ad Spend, is your revenue generated by advertising divided by the dollar amount you spent on that advertising. The formula is:
ROAS = revenue made from ads / advertising spend * 100
ROI, or Return on Investment, is a bit more broad and looks at your overall investment. ROI is calculated by the return (minus all expenses like operating costs and costs of goods sold) divided by the dollar amount invested.
ROI = (net profit / net spend) * 100
Both these metrics are important for understanding if your invested money is yielding a profitable return.
What is a good ROAS for YOU?
This is definitely one of the most asked questions, and there isn’t a “one size fits all” answer. It really depends on each business, their growth stage, the cost of goods sold, operating expenses and lifetime value of a customer. It may sound like a lot of variables to consider when evaluating what your target ROAS should be, but keep in mind that a good ROAS should generate a return that pays back for expenses, while still enabling your brand to invest and grow.
For example let’s take into consideration how lifetime value can affect your ROI and therefore your acceptable target ROAS. If you’re in the CPG business, and your customers tend to replenish monthly - you’ll be open to accept a higher cost per acquisition, as your customers have a longer lifetime value than a fashion brand who sells a limited number of pieces per customer each year.
Another important variable to take into account while calculating the profitability of your advertising efforts is the length of the decision journey: how many days will your customer spend in the market actively researching or considering products before making a purchase? This answer will also be specific to each product/vertical. A car buyer will spend an average of 96 days in the market, while most retailers report that their customers take 1 month or longer to make a purchase. This means that each conversion is likely to be the result of multiple touch points (and advertising impressions). So, when analyzing the effectiveness of your campaigns, it is important to take into account a reasonable timeframe for the consumer to convert.
The Attribution Question
It’s important to keep in mind that each advertising platform (FB, Google, etc.) determines its own ROAS measurement based on the data it receives from the platform’s individual tracking pixel. More often than not, the attribution is based on a last-click model - meaning the sale will be attributed to the last ad the user engaged with. So it will be hard to know to what extent the previous impressions have helped the consumer make up his/her mind.
Double attribution can also occur since each platform only has visibility on its own ads. So, for example, if a potential buyer was exposed to both a Facebook and Google ad, each platform will attribute the conversion as their own.
In some cases, you can also have a missed attribution. This occurs when a new customer visits your site directly from your URL or from Google organic search. A common scenario representing this is when a user sees your ad on one device, and then types in your URL or does a Google search of your brand on another device. Everyday Google and Facebook become better at recognizing users across devices, but occasionally some attributions fall through the cracks. This is even more likely if you are running ads on yet another platform like TV, radio, or out-of-home advertising.
When monitoring your campaign performance, it’s best to compare apples to apples. Look at each platform individually to see where you can optimize your campaigns. However to have a broader picture, calculate your ROAS taking into account your total revenue, and your expenses across all of your advertising platforms: total revenue / total advertising expenses.
You may object that your CRM and email marketing are generating the most of the replenishment revenue. In that case you may want to focus on new customer acquisition. To do so, you can sum up the revenue of all newly generated customers and divide it by the budget you have invested in prospecting first time customers only.
There are many variables that go into calculating your ROI and establishing your target ROAS. The most important thing is to come up with a model that helps you aim for a sustainable objective without compromising the growth of your business.