I recently came across a post in a Facebook group where someone was asking what is considered to be a decent Facebook ROAS number (ROAS = return on ad spend).
This blog post is not only in response to this initial question but also aims to address some of the generic and quite frankly, uneducated replies I saw like this one:
“Somewhere over 2 is good.”
Really? How did you come to this number?
So the problem with the original question is that there’s no context and we’re lacking important information about the business in order to determine what their target or ideal ROAS should be.
What is the goal of the campaign?
What are you trying to achieve?
Who are you targeting?
What is your gross profit margin on this product you’re trying to sell?
You can also look at the age or maturity of the business. This can help you to set some ROAS expectations.
SPOILER ALERT: there is no one-size-fits-all response.
It depends on many factors which I will go through in this post.
You’ll need to calculate a few things in order to determine what a “good” or “bad” ROAS is and it also depends on your business model and what you’re selling.
If you’re selling a subscription, membership or there’s recurring revenue from the same customer, you can afford to have a lower ROAS and pay more to acquire a customer.
Digital vs physical products will also have an impact.
If your product is a 1-time purchase, generally speaking you need to have a higher ROAS to remain profitable since you don’t have another future opportunity to earn more revenue from that same customer.
So let’s start with a basic calculation of ROAS.
How to Calculate ROAS?
The equation to calculate return on ad spend is quite simple.
Take the revenue generated from your ad and divide it by your ad spend.
So for example, if you spent $10 and you generated $100 in revenue, your ROAS would be $100 / $10 = 10x.
ROAS is represented as a multiple.
Another example would be that you spent $100 and only generated $50 in sales.
The ROAS in this case would be $50 / $100 = 0.5x.
A ROAS over 1x means that you generated more revenue compared to what you spent.
Conversely, a ROAS under 1x means that you spent more than what you generated in revenue.
You cannot have a ROAS less than 0.
Another term that gets thrown around is ACoS.
ACoS stands for Ad Cost of Sales and is a metric used in the Amazon world.
If you’re ever advertised on Amazon using their PPC Advertising Platform, you’ll be familiar with it.
ACoS is the inverse of ROAS in terms of how it’s calculated but it’s just a different way of saying the same thing:
How are my ads performing?
ACoS is calculated by dividing your ad spend by the revenue generated multiplied by 100%.
So using the same example above, if you spent $10 to generate $100, your ACoS would be $10 / $100 = 0.1 x 100% = 10%.
So a 10% ACoS is the same as a 10x ROAS.
25% ACoS = 4x ROAS
50% ACoS = 2x ROAS
Now that we know how to calculate ROAS, let’s go over how to calculate your business’ target ROAS.
Know Your Numbers: Calculating Your Target ROAS
Before you go out and start spending money on ads, you need to know your numbers.
I’m going to go over calculating your target ROAS for 2 different business scenarios I mentioned earlier.
- Membership / Subscription / Recurring Revenue Model / Consumable Product
- 1-Time Purchase
So the only difference between these 2 is qualifying what an “acceptable” target ROAS is.
With a recurring revenue model, you can afford to spend more to acquire a customer which means a lower ROAS would be acceptable.
Why is that?
Because once you make the initial sale, you have their email and can reach out to them whenever you want without having to pay Facebook to reach them again.
You can break even or even lose money on the initial purchase because you’ll have more opportunities in the future to continue selling to them.
With a 1-time purchase model where you only have 1 product to sell them, you should aim to be profitable with your initial campaign.
That’s because you have 1 shot to make the sale so you need to aim for a higher ROAS.
So with that in mind, let’s go into figuring out how to calculate your Target ROAS.
You need to know a few things:
- Average Order Value or your Expected Revenue per Sale – let’s use the example figure of $50.
- Your cost of goods sold (COGS) – let’s say it’s $25
- Any fulfillment costs (warehouse, shipping) – let’s say it costs $5 in warehouse and shipping fees
- Payment processing fees – let’s assume 3% of $50 which is $1.50
Essentially, you need to know your gross profit and revenue.
So on a $50 sale, we need to deduct our product cost which is $25, fulfillment fees which include shipping of $5 and processing fees of $1.50.
$50 – $25 – $5 – $1.5 = $18.50.
So after selling our $50 product, we’d be left with $18.50 (our gross profit).
The next step would be calculating our breakeven ROAS.
How to Calculate Breakeven ROAS?
Our breakeven ROAS calculation tells us the maximum we can spend before we start losing money.
This is an important metric to keep in the back of your mind while you’re monitoring the performance of your ads.
Breakeven ROAS Equation
Revenue / (Revenue – COGS – Fulfillment) = Breakeven ROAS
In the case of our example, our target ROAS would be $50 / $18.50 = 2.7x ROAS
So if we spent $18.50, we would need to make 2 sales @ $50 to generate the required $100 to break even on our ads.
$100 in revenue – ($25 x 2 COGS) – ($5 x 2 in fulfillment) – ($1.50 x 2 in processing fees) – ($18.50 x 2 in ad spend) = $0.
That would yield our breakeven 2.7x ROAS.
In this scenario, we are spending the equivalent of our gross profit to make the sale.
Wait a second!
Don’t we want to make a profit? In what scenario does this make sense?
Determining your Desired ROAS
There are indeed a few scenarios where breaking even or even losing money on your ad campaigns makes sense:
- You’re just getting started
- You have a brand new Facebook pixel
- You’re launching a new product and want to get product out in the wild
Circling back to what I mentioned earlier, it depends on what you’re trying to achieve and the current situation of your business.
This scenario can be justified for both recurring revenue models and 1-time purchase models depending on your goal.
Recurring revenue makes sense because you’re breaking even to acquire this customer so any future sales you make from this customer don’t have any additional advertising costs associated with them and you’ll be profitable in the long run.
1-time purchase models also make sense if your goal is to simply season your Facebook pixel or just get some products into the wild with the intention of generating some reviews for example.
If your goal is to be profitable on these ads, well then it doesn’t work.
If you want to be profitable, you’d need to aim for at least a 2.8x ROAS and in that case, you’re making just over $1 in profit.
In the case that you’re selling a digital product and assuming it only cost you your time to create what you’re selling, you have no cost of goods sold associated with your product.
Let’s say you have a digital eBook that you’re selling for $19.
No COGS or fulfillment fees.
Processing fees are 3% of 19 = $0.57.
Your breakeven ROAS is $19 / ($19 – $0.57) = 1.03x
In this example, you can spend up to $18.43 which means you can afford to pay more to acquire a customer and still break even.
A 2.7x ROAS selling a digital product like this would mean you’d spend $7.04 to make a sale.
So a 2.7x ROAS selling the digital product is amazing and highly profitable whereas a 2.7x ROAS selling our $50 physical product earlier yields no profit.
I hope it’s not clear that you can’t make a blanket statement that a certain ROAS is good.
As you saw, it depends on many factors.
Summary
In closing, you now know how to calculate ROAS, calculate your breakeven ROAS and how to qualify what an acceptable ROAS is.
Now you’re armed to evaluate your ad’s performance based on the ROAS.
Good luck!
