You know, Peter Drucker, the godfather of business consulting, once said, "What gets measured, gets managed." Ain't that the truth? But the thing is, most Amazon sellers are so busy measuring the wrong things, they might as well be buying Bezos another rocket.
Every cent you spend on advertising? That's a potential profit. Or it's just another donation to the 'Help Bezos Buy Another Rocket Foundation.'
So how do you tell the difference? You calculate your Break Even ROAS, that's how.
By the way, have you heard of dayparting? It's an advertising strategy that promises significant results. Learn more about dayparting PPC here.
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What the Heck is ROAS?
Alright, let's cut through the jargon. ROAS stands for Return On Ad Spend. Think of it as the money you get back for every dollar you chuck into advertising. If you're not thinking about ROAS, you're not thinking about your bottom line.
Break Even ROAS: Your Guardian Angel Against Wasted Ad Dollars
Now, let me introduce you to the concept of Break Even ROAS. This little gem tells you exactly when your advertising is profitable and when you're just lining Bezos's pockets.
To work out your Break Even ROAS, you must first determine the “profit before advertising” for each product. Here’s the formula:
Profit before advertising = (Selling Price – COGS)
This takes into account your selling price and the Cost Of Goods Sold (COGS) — the money you shell out to create your product (material costs, labor costs, manufacturing costs, etc.).
Example Time: Break Even ROAS in Action
Let's say you're selling widgets for $50 each and your COGS is $20. After the cost of goods, you're left with $30. This is your profit before advertising.
Now, if your advertising costs are equal to this profit before advertising (i.e., $30), then you are not making or losing money on the sale. This is the break-even point.
From this break-even point, you can calculate the Break Even ROAS. Here’s the formula for that:
Break Even ROAS = (Product sale price/break-even point)
So, in this case, the Break Even ROAS is ($50/$30) = 1.67. That means you need to make more than $1.67 in revenue for each dollar spent on advertising to make your ads profitable.
The Devil in the Details: ACOS, CLV and Break Even ROAS
Now, let's talk about ACOS – Advertising Cost of Sale. This shows you the advertising cost for each dollar of revenue in ad sales. It’s essential to look at both ACOS and ROAS to understand your advertising cost and revenue.
Let's not forget about the Customer Lifetime Value (CLV) either. CLV is a key metric that quantifies the total value a customer brings to a company over the course of their relationship.
By analyzing CLV, you can better understand the profitability of your customer base and tailor your strategies accordingly to maximize long-term retention.
Perhaps you're also considering the use of automated advertising. In that case, Amazon DSP is what you need - learn more here.
Calculating CLV-adjusted Break Even ROAS
Understanding CLV is crucial when you're calculating your Break Even ROAS. Here’s how to calculate your CLV:
CLV = Average order value x Orders x Retention period
For instance, if you spend $10 on advertising to generate a $20 sale, your ROAS seems good at 2. But what if that same customer purchases your product five more times over the year, resulting in a total of $100 in sales for the same $10 ad spend? Suddenly, the ROAS increases to 10.
After finding the CLV, you can calculate the CLV-adjusted Break Even ROAS by dividing CLV by your total ad spend.
CLV-adjusted Break Even ROAS = CLV/total ad spend
This will help you make informed decisions about allocating the advertising budget and growing your business over the long term.
Enter the Dragon: ACOS and Break Even ACOS
Now, when do you use ROAS and when do you use ACOS? Well, that depends on your business.
ROAS is great when you want a bird's eye view of your advertising performance. It's all about seeing how much bang you're getting for your buck.
ACOS? That's more about the nitty-gritty details. It's perfect when you want to see how your advertising costs are eating into your product price.
But here's the thing. Whether you're using ROAS or ACOS, you need to be using something. And if you're not considering CLV when calculating your ROAS, you are losing out on more sales.
Because if you're not measuring, you're not managing. And if you're not managing, you're just buying Bezos another rocket.
Remember what the Oracle of Omaha, Warren Buffett said: "Price is what you pay. Value is what you get." S
o start calculating your Break Even ROAS, ACOS, and CLV-adjusted ROAS today. Don't just look at the price you're paying for your ads, understand the value you're getting back.
Break-even ROAS is a crucial metric for understanding the real profitability of your Amazon ad campaigns. It considers your profit margins, including COGS and Amazon fees. It tells you how much you need to earn in revenue for each dollar spent on advertising to break even.
ACoS tells you the advertising cost for each dollar of revenue in ad sales, which helps you understand the efficiency of your ads.
CLV-adjusted break-even ROAS is a critical metric that takes into account the total value a customer brings over the course of their relationship with your brand. It helps you make informed decisions about allocating the advertising budget and growing your business over the long term.
So, start measuring these metrics today and ensure you're gaining value, not just spending money. After all, you don't want to fund another rocket for Bezos, do you?
Another way to optimize ROAS is by optimizing your SEO strategy. Click here for our guide to the most effective SEO strategies on Amazon.
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