The Benefits of Break Even RoAS
Summary
If your company is paying for advertising, you should be monitoring how much revenue is being generated and how much you are spending to achieve those results. Most advertising platforms allow users to access detailed analytics reports, which contain useful information that can be used to determine how well your ads are performing. That data can also be used to optimize future advertisements, so you should always review your analytics reports thoroughly whenever possible.
When evaluating your analytics reports, you can use certain metrics like Return on Ad Spend (RoAS) to understand how well your advertisements are performing. Here is how knowing your RoAS can be beneficial.
Calculating RoAS and Break-Even RoAS
The formula for calculating RoAS is actually quite simple.
Imagine you have a $50 product that you wish to sell using ads. After running the ads for a while, you manage to sell ten units of the product. This means your total revenue is $500.
Now you need to think about how much was spent on ads. If you spent $100 on ads to sell ten units, your RoAS would be 5. This means that for each dollar spent on advertising, you earned $5 back.
There are more complex ways to calculate RoAS as well.
The standard formula is as follows:
RoAS = (AOV x CVR) / CPC
Your AOV is the average order value, your CVR is your conversion rate, and your CPC is the cost per click on your ad. Plug each value in based on your own metrics to determine what your current RoAS is.
Now, you should be ready to learn about break-even RoAS.
Break-even RoAS
Break-even RoAS is a metric that is used to help advertisers determine what RoAS figure needs to be hit in order for an advertising campaign to be profitable. The calculation requires three major data points:
- Revenue – The amount of income earned for goods sold by you.
- Cost of goods sold (COGS) – The cost of sourcing and producing your products.
- Gross profit – Revenue minus COGS
With this data on hand, you can just plug values into the following formula:
1 / (Gross profit – Revenue) = Break-even RoAS
Once the calculation is done, you use the inverse to determine the minimum target.
Here is an example of how you can calculate break-even RoAS.
If you generate $50 in sales and your COGS is $35, then your profit margin would be $15. If generating that $50 in sales cost you $10 in ad spend, your RoAS is 5. This would exceed your break-even point by approximately 28.5%.
How To use Break-Even RoAS
Break-even RoAS has many use cases, but it is primarily used for benchmarking, targeting, and informing advertising strategies.
Benchmarking
Your break-even RoAS allows you to measure the performance of your products, services, or business processes. This is ultimately quite valuable in any economic space, as the more you know about the performance of your products, the more capable you will be of adapting your business to further increase revenue. For e-commerce brands, especially those operating on Amazon, using break-even RoAS can allow you to identify internal opportunities for improvement as well.
Targeting
To produce the most effective marketing campaign, you must break your consumer audience into segments. If you try to use an incredibly broad advertising strategy, you may notice that people will be less engaged, as the campaign isn’t designed to suit any one group’s interests.
You shouldn’t aim to reach an entire market, instead concentrate on certain groups within your desired market. You’ll find greater success, and you can use your break-even RoAS to determine which market segments are most profitable and easiest to reach. Once you’ve managed to connect with a defined group within the market, you can replicate the steps you took to reach out to another audience.
Strategy
If you are running an ad campaign, and the break-even RoAS has been difficult to reach, it may be time to alter your strategy based on new information. Having RoAS metrics on hand can help you decide when its time to change course, because an underperforming or overly costly advertisement should not be allowed to run for too long. With effective market assessment, media analysis, and budget maintenance, you can develop an effective marketing strategy that encourages optimum outcomes.
What is Customer Lifetime Value (CLV)
Customer lifetime value effectively measures the value a customer has to your company, not on a purchase-by-purchase basis, but across the entirety of your relationship. The CLV pretty much defines how much a customer will be worth to your business across their entire lifetime. Read more about CLV in our customer acquisition article.
Application
Customer lifetime value is important, especially when you are monitoring RoAS as well. Knowing how much you are spending on ads is one thing, but learning how much value each customer you gain through those advertisements is important as well. While your RoAS may account for sales made during the lifecycle of an advertisement, it may not be as easy to track recurring purchases that will be made in the future by people who saw that ad.
Example
The CLV is great to use when you expect a long-term relationship to be built between you and your customers. For example, the CLV for a product like toothpaste vs a product like a lawnmower is obvious. People may need to purchase toothpaste once a month for their entire life, while the average person only owns a few lawnmowers over the course of their lifetime.
It makes sense to use break-even RoAS to better understand your CLV.
Use Break Even RoAS To Improve CLV
Your RoAS should always be higher than your pre-advertising profit margin. Ensure that there is a wide gap between the two metrics because if there is, that means your end profit margin should be significant. Though, sometimes it may be worthwhile to take a loss. For example, in instances where you can secure a customer with a high customer lifetime value, it could be acceptable to suffer a poor RoAS or break-even RoAS.
You may wish to calculate a break-even RoAS that accounts for CLV as well. This can be helpful, because CLV provides more diverse context for your RoAS and break-even RoAS. Knowing more about CLV will allow you to identify your exact customer acquisition costs and give you more insight into where your ad spend is best placed.
You can make basic calculations about CLV using metrics like average number of customers, and average number of orders vs average revenue. Though, you’ll never be able to crunch the numbers effectively without access to a powerful data and analytics tool.
Capitol Data Analytics uses data science to reveal important insights, and we can help you use break-even RoAS to improve your CLV easily. If you get in touch with one of our consultants, we can help you start using data to your advantage.
Plan For The Long Term With Break-Even RoAS
Though, someone in the field would tell you that break-even RoAS can be helpful for determining how you can outbid competitors and cut losses. You can also use it to determine which markets you need to prioritize, allowing you to expand your reach and potentially increase revenue.