ROAS is always a hot topic in the world of e-commerce. As e-commerce continuously gets more competitive, and acquisition costs rise due to competition it’s important to understand the reality of what’s achievable when it comes to ROAS and acquisition as a whole. Along with the variables that are controllable.
E-commerce businesses have a lower probability of success without a robust retention strategy done through Email & SMS. Having a high return customer rate and LTV is essential to drive the necessary profit to facilitate growth as an e-commerce business. Acquisition costs are slowly rising YoY, and that isn’t the fault of any specific Media Buyer or marketer, it’s purely a product of rising competition which drives up the cost of marketing to prospective customers. Because of this, a holistic approach to scaling your business is needed. Paid ads are dependent on Email & SMS to drive high-profit sales for the business, and on the flip side Email/SMS is dependent on Paid Ads to drive a high volume of new customers to monetize. In this equation, ROAS is one piece of the overall pie and it is unrealistic to assume you’re going to be able to drastically change your ROAS once you have enough history running ads. This is why a holistic approach is crucial to scale effectively and profitably.
Now back to the ROAS range and what it is! Multiple large-scale studies have been done on the average Facebook reported ROAS on acquisition for DTC e-commerce brands. The average range for DTC brands seems to be 1.5-2.0 new customer ROAS (new customer revenue divided by ad spend). However, some businesses can scale healthily if LTV is high, or if they have high margins even with a lower ROAS on acquisition. It is a myth to some degree that you can drastically change your ROAS on an offer once it has been sufficiently tested but more on this later…
What this ROAS signal vs noise diagram aims to showcase is the realistic expected ROAS range that is achievable at scale. The blue line represents the signal (or baseline) ROAS that you can expect to achieve once you’ve set your offer and angle. The green and red lines represent the potential higher or lower band of performance (noise) which can be achieved through budget allocation and ad creative adjustments. The only scenario where the signal can be dramatically improved is if the media buyer/advertiser running the account is making errors in the general account structure. Once the account structure is set up properly, you can expect your performance to generally follow the supply and demand trends in the marketplace for your offer. Knowing you have only so much control over these variables is why there is value in diversifying your offers as well as your ad platforms at larger amounts of scale.
Now, there are always anomalies however 9/10 times this is what is achievable. In order to see vast improvements in performance or ROAS on acquisition the controllable variable that will move the needle significantly are your offers and angles.
ROAS is one piece of the pie, and ad platforms are dynamic marketplaces meaning you’re competing against other businesses in your respective niches that are also bidding on your audiences. The businesses with the best offers and angles will see the most success for the most part on acquisition. However, when trying to analyze appropriate CPA metrics the main focus should be on understanding your LTV and profit payback periods over cohorts of time on acquired customers to understand what CPA’s make sense for your business. For example, you may have two products with the same margin, one with a $40 CPA and one with a $50 CPA. If the $50 CPA has far superior LTV, this still may be the better offer.
The importance of a holistic strategy has never been more important in e-commerce in order to scale sustainably and profitably!
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