If you have ever run a paid advert or are looking to work with an advertising agency, then you should be familiar with ROAS and how to set a target.
ROAS stands for Return on Ad Spend and is simply calculated by taking how much you make from your adverts and dividing it by how much you spend.
Generated from adverts: $60
Spent on adverts: $20
ROAS: 3 ($60/$20)
In other words, a ROAS of 3 means for every $1 you spend, you generate $3.
Whenever you run adverts or work with an advertising agency, you should have a pre-defined target ROAS to aim for. By calculating your current ROAS and comparing it to your target ROAS, you will know whether your adverts are being successful.
What should my ROAS be?
There is no specific number that everyone can use meaning you must calculate your target ROAS.
Let’s assume you are crowdfunding a product that has a value of $100.
You first need to know all your costs for making that product and getting it to your customer:
- Manufacturing $18
- Freight $5
- Fulfillment $20
- Other $2 (other costs might include designer royalties, artwork, development, graphic design etc).
Our running cost total is $45
You should also take note of any fees you will be charged for receiving your $100, let’s assume the crowdfunding platform and processing fees will be $10 (10% of the $100 product).
Out total cost now is $55.
This means if we spend $45 on adverts to get 1 sale and generate $100, we will break even.
Let’s divide $100 by $45 to generate our target ROAS of 2.23.
If we hit 2.23 or higher then we will make a profit from our adverts, if we drop below 2.23 then we will start losing money.
A note on shipping and taxes
Shipping and taxes may vary by location, you will need to work out your averages when assigning values to these for your calculation. Keep in mind, not all countries are equal so you should calculate your averages based on the estimated % of backers from each region.
If you charge your shipping and taxes in a pledge manager after your campaign, then you can leave those out of your ROAS calculation assuming all the costs are covered separately.
A note on multiple products
If you have multiple products, you will need to calculate your target ROAS for each product and then work out your overall average based on how many of each product you expect to sell. Remember to play it safe as customers don’t always do what you expect!
A note on agency fees
If you are using an advertising agency then you should include their costs within your calculation – This is something most people forget to do and end up losing money!
An agency might take 15% of the revenue they generate.
Let’s see how this would impact our previously calculated target ROAS of 2.23.
With a 15% fee our costs are now $15 higher and total $70, leaving us with only $30.
$100 divided by $30 gives us a new ROAS of 3.34, considerably higher than the previous ROAS of 2.23.
Spending more money
If you have a target ROAS of 2.5 and your adverts are returning at 3.2 then your first thought may be that this is great, I’m making a good profit. This is where you may want to consider slowly raising your ad spend and watching how it impacts your ROAS. Typically speaking the more you spend the more your ROAS will drop and you have a choice:
Get less people but make a greater profit or get more people but make a smaller profit.
For crowdfunding I like to increase my adspend until I’m slightly above my target ROAS, say 2.6 when my target is 2.5, as this generates the highest number of backers. More customers means more people are talking about your game, leaving reviews, sharing things, commenting, and generally you will have a bigger buzz.
For longstanding products I like to keep my ROAS much higher than my target as I want to generate profit!