Chapter 6: Let The Data Do The Talking
ROAS stands for “Return on Ad Spend”, and is perhaps the single most important metric to look at when analyzing your campaigns. ROAS is expressed as a positive number relating the amount of money spent on ads to the amount of revenue generated. ROAS is actually a metric tracked in the Ads manager, and is a useful column to always keep on your dashboard. Utilizing Pixel data, Meta is able to accurately calculate ROAS for all individual ads, provided you are selling an actual product. ROAS calculations on conversions like leads and app downloads are a bit trickier, as your customer value may be more arbitrary, but for the sake of this section we will assume you’re selling an actual product on your store.
ROAS is calculated as:
(Revenue from Ads / Cost of Ads) * 100
A ROAS of <1 means that you are spending more money on ads than you are making in revenue. Conversely, a ROAS of >1 implies your ads are driving more revenue than they are costing.
This metric alone isn’t enough to calculate overall profitability. To understand if your ads are truly profitable, you need to calculate your Breakeven ROAS, which includes COGS, operating expenses, and anything else that affects your overall bottom line.
Let’s assume you generate $10,000 in revenue in a month. Expenses excluding ad spend totalled as follows:
$4,000 Cost of Goods Sold
$1,500 Shipping
$300 Web Hosting & Apps
$800 Taxes
$600 Contractor Payments
Total Expenses: $7,200
Total Profit: $2,800
Profit Margin: 28% (Calculated by (Total Profit / Total Revenue) * 100% )
To calculate your Break Even ROAS, use the formula: 1 / (Profit Margin)
In this case, the Break Even ROAS is 1/28%, or 3.57
That ROAS is a lot higher than 1, but remember, your business has other expenses. Cost to produce your product, pay your team, and create your ads all affect your profit margin and bottom line. Even if this business was running ads with a 2.5 ROAS, they would still be losing money overall. This is why it’s absolutely critical to calculate your breakeven ROAS upfront, and ensure your campaigns are staying in the profitable zone. Obviously this example is slightly egregious in the expenses department, but it is intended to illustrate the gap between ads that are “profitable” on paper vs. in actuality.
If you’re just starting out and don’t have previous operating statements to calculate profit margin, you can do the same calculations downscaled to a single product. Say your product sells for $100, and you offer free shipping to the customer. The expense breakdown could look like this:
$30 Cost of Goods Sold
$15 Shipping Cost
$8 Contingency / General Expenses (this number can be an estimate, but err on the higher side. You would rather overestimate expenses than underestimate).
This product sells for $100, and has ~$53 of expenses associated with its sale before ads. Meaning it has a 47% profit margin, and a 2.13 Break Even ROAS.