The other day, someone asked me about a Facebook Ad campaign that they had run and whether their ROAS (Return On Ad Spend) was good.
Now the ROAS was around 19 which on the outside looks pretty good – I mean who wouldn’t be happy with making $19 for every $1 they spend on advertising?
But that’s where ROAS can trip people up, because it’s not the only metric you need to look at in order to ascertain whether your campaigns are working. There are many other factors that go into being profitable and I’d like to look a few of those today.
To keep things simple for this video, I’m going to assume that you are an eComm business selling products or services that the purchase and purchase value of can be ascertained by your Facebook Pixel. I’ll touch on other business types such as Lead Generation in a separate video.
Return on Ad Spend
As I mentioned, Return on Ad Spend (ROAS) is the amount of revenue generated for every dollar spent on advertising. Now to be honest, it is the Holy Grail of ad metrics and the one to use when you want to instantly understand your advertising results because it shows you if every dollar you invest in your advertising is returning you at least a dollar back in revenue.
The formula for calculating ROAS is simple: Revenue ÷ Ad Spend = ROAS and Facebook Ads Manager has a column that shows exactly that.
So as an example, your eComm business sold 100 units of a $20 product from your Facebook Ads last week, which is $2000 in sales. To make those sales, you spent $200 on Facebook ads.
Your ROAS is 2000 ÷ 200 = 10 which means you’re making $10 for every $1 spent on marketing.
Happy days, right?
What ROAS tells us is that our Ads are profitable – they are making more money than they are using. But they don’t tell us if the business is profitable because they don’t factor in any costs except advertising. So, what else can we look at?
Cost per Purchase
Say hello to my little friend, Cost per Purchase. Now this fella here will be ignored by a lot of marketers because; 1. It’s harder to analyse, 2. It never tells a better story than ROAS and 3. They are not used to it because they sell their services, not products and their overheads are much and easier to establish.
But I own physical stores and eComm businesses and know that this is where the real profit analysis is.
And if you’re a physical or eComm store owner, you can already see where I’m going because the difference between being in the red or the black is the difference between your revenue and ALL your costs.
Cost per Purchase tells you exactly what it is costing you in ad spend to get a sale.
In order to fully analyse this, you need to have some data that Facebook doesn’t have such as your Average Purchase Value and an estimate of what it costs you to get that purchase out the door to your customer.
So for an eComm business, you might need to calculate such things as:
Cost of Goods;
Fixed Costs (rent, electricity etc.);
Packaging & Postage Costs.
How you calculate this and what you include is very much up to you but at the end, you should have two things:
Average Purchase Value;
Average Cost per Purchase.
So, let’s look at our previous example – you sold 100 units of a $20 product. After analysing your costs, you determine that with your wholesale costs, staffing and fixed costs plus the packaging and postage to get it out the door, it costs you $7.10. Take that from the $20 and you’re left with $12.90.
Based on that, you determine that at most, you can only afford to have your advertising cost you $2.10 per purchase or else you’re not making a profit at all (especially seeing as we haven’t even factored in tax etc.).
So let’s go back to cost per purchase.
In this example, the Cost per Purchase is Ad Spend ÷ Purchases or $200 ÷ 100 = $2.
Which is JUST inside your acceptable cost which gives you a more real world view or your profitability than an ROAS of 10:1.
So always be aware of the bigger picture and don’t get carried away with vanity metrics or single numbers that don’t tell the whole story – it will make all the difference in the end.