Last updated on 07/13/2022
How to increase ROAS?
You started a digital business in addition to your physical business.
You create your own products in your atelier, living room, kitchen… or even garage, like Steve Jobs.
You are convinced that you can sell online and make a lot of money.
So you contacted an e-commerce and digital marketing expert to help you or looking for yourself how you can sell online.
He told you or you heard about ROAS, CPM, CTR, CPC, AOV and CLTV. You’re no further along at the end of your appointment because you don’t understand much about it.
You’ve just started working in digital and in your first marketing meeting you hear these ROAS CPM CTR CPC AOV LTV, but you don’t understand them.
If this is the case, then this article will help you. I have tried to explain as simply as possible with a concrete example of what these letters together mean and how to improve them.
Say Hello to Digital Marketing KPIs
These letters are actually KPIs that allow you to evaluate the performance of your acquisition strategy and estimate the expenses of a client.
ROAS = Return On Ad Spend
This is an ad profitability ratio. It takes into account what you spend on advertising and the total conversion value. If you spend $1 on advertising, how much do you get in ROAS?
ROAS calculation = Result in $ / Amount spent in $.
For example, I spend $100 and sell for $1000 thanks to paid ads, my ROAS is 10, that is to say for $1 spent I generate $10 of revenues (not $10 of margin).
$1000 / $100 = 10.
It is challenging to provide an average ROAS because it depends on too many factors to take into account.
If your e-commerce business model allows you to generate gross margins around 40% per unique transaction (some are more around 20% and others around 70% depending on the different costs) and that the price of your products does not exceed $60, your minimum ROAS (also called breakeven ROAS) should be around 2 or 3. That is, the ROAS that allows you to not lose money.
The above sentence is to be taken with a grain of salt because you do not really lose money, you invest. You pay for the impression or the click and not for a purchase systematically.
Let’s take an example:
Bransper is a fictitious brand that sells silicone jewelry.
The product they decide to promote on social media is $40.
The unit costs are as follows:
● The production cost of one product: $15
● Transportation costs from the supplier to their warehouse: $2
● Shipping cost from the warehouse to the customer: $5
● Processor fee for online payment and CMS: $1.2
● Total cost $23.2
Margin Rate =(40-23,2)/40 = 42%.
● Breakeven Cost per purchase: $16.80
● Breakeven ROAS: 2.38
To be profitable, Bransper will need to pay a maximum Cost per Purchase of $16.80.
This is, in theory, about performance. In reality, even getting a customer for $20 per acquisition cost will be worthwhile if you can increase their AOV and LTV!
At the end of the article you will understand better what I mean, I hope.
How to improve ROAS?
To improve your ROAS, your entire conversion funnel needs to be optimized.
CPMs, CPCs, CPAs, AOVs, conversion rates, attribution, and many other metrics affect ROAS.
The goal is to go back to the beginning of the conversion funnel (the first time a customer sees the ad or discovers your brand via an ad blog post, etc.) and look at how you can improve the ad, the marketing angle, the description to get them to click on the call to action button, and then when the customer gets to your brand’s website, how you can improve the landing page, purchase page, checkout, and follow up emails to get them to buy.
The ROAS will also depend on all these elements that are outside the advertising platform.
CPM = Cost Per Mille (impressions)
It means what it costs you to get 1000 impressions on the platform, social media or website where your ad is shown.
CPM calculation = (Total ad cost / Total impressions) * 1000
For example, if you pay $4000 for 160,000 impressions, then your CPM is $25.
(4 000 / 160 000) x 1000 = $25
The CPM has a strong seasonality, it depends on the advertising platform where you run your ads campaign, the country you target, and the audience you want to reach. Moreover, Facebook can reduce or increase your CPM depending on the quality criteria of your ad (defined by Facebook).
How to decrease CPM?
Paying a high CPM is not necessarily bad if you have a lot of purchases.
But as you may think, the less you pay, the more people you can reach with your ads at a lower cost.
Keep in mind that it all depends on your marketing goals. If you want to optimize your ad campaign for conversion, you will inevitably pay more per impression, but for more relevant ad targeting.
If you are satisfied with the ROAS you get, even in the scaling phase when you increase your budget, the CPM can be left aside.
Note that sometimes you may have $50 or more CPM. It can be one of the two scenarios below.
- It’s Black Friday or another important online promotion event, the advertising costs increase because all the advertisers have activated ad campaigns, the advertising inventory is thus limited and you have to deal with the offer lower than the demand, thus costs which increase.
- Facebook has deliberately set a high CPM on your ad account because it has noticed a bad user experience on your landing page, or your Facebook page score is starting to drop. Here you should be alerted and look at what is wrong.
CTR = Click-Through Rate
The ratio of clicks to impressions.
Calculation of the CTR = (Number of clicks / Number of impressions) * 100
If your ad has 1000 impressions and you get 30 clicks, your CTR is 3%.
A CTR of 3% is ok. Below 1%, you should optimize your ad or targeting. It can vary depending on the industry and the target audience.
If your CTR is high, it means that your ad campaign is optimized and targeting the right audience. In other words, your ad is interesting enough to get people to click on it, and you will be rewarded by the platform.
How to improve CTR?
If your CTR is above 2%, you can assume that it is already good. Below 1% You will have to look closer at some elements. Except for some campaigns such as Google Display, 1% is fine.
- Look at how long the ad has been active, it may be that the audience is tired of seeing it regularly, so it will have to be changed completely. We call it “Ad Fatigue”
- If you have several ads in an ad set and you are not in Dynamic Ads, look at large and small-time windows, which one tends to have a higher CTR than the others. Try to identify why by A/B testing.
- Look at the audience you are targeting, generally remarketing audiences (customers and leads) have a better CTR.
Regarding cold audiences (who have never seen your brand before) which ones have a better CTR?
It is necessary to test different ads to optimize the CTR. But again, if the ROAS is already good, don’t focus too much on the CTR.
CPC = Cost per click
On differents Ads platform, CPC is a way of billing ads.
Each time a user clicks on your ad, you are charged an amount determined in advance according to manual bidding (by you or your agency) or automatic (by the algorithm).
CPC calculation = Cost / Number of clicks
There is no average CPC and many factors influence the cost per click such as the country chosen to display the ad, the keywords targeted via Google Ads, etc.
A cost per click can be calculated per day, week, month, per ad, per ad group, per campaign, per keyword…
How to decrease CPC?
The relevance of the ads, the choice of keywords, and the quality of the landing pages experience where the user who clicks on the ad is sent are elements that can increase or reduce the performance of your CPC advertising campaigns.
You’ve seen a lot of calculation formulas so far, haven’t you? Don’t worry, ad platforms integrate these KPIs into their dashboard. By checking a box you can select them to appear on your ads manager dashboard and you will have the numbers appear automatically.
These KPIs are not Ad-centric like the previous ones but site-centric and customer-centric. Meaning they are centered on websites and customers. They calculate the average spend of a customer and determine the revenue generated by each customer.
AOV = Average Order Value
How much on average does a customer spend on your e-commerce store for an order?
This is what the AOV tracks. The average amount spent each time a customer places an order.
AOV calculation = Total revenue / Number of orders
Bransper, the silicone jewelry brand generated $1,200 on its e-commerce website last month and had 30 orders. AOV is therefore $40.
$40 = $1200 / 30
The higher your AOV, the more profitable your e-commerce business can be because it tells you that on average people are spending more per order on your e-commerce website.
How to increase AOV?
The AOV can be optimized in various ways:
- Implement an email marketing automation strategy
- Create pre- and post-purchase Upsells
- Create pre and post-purchase Cross-sell
- Create bundle
- Set up automatic promotions such as 2 bought = 1 free.
- Free shipping on orders over a certain amount
These e-commerce marketing techniques can be extremely effective but keep an eye on your margins. It’s not only the gross revenue but the net margin that is important as well.
If you have opened Google Analytics, you may have also seen names that are a bit more easy to understand this time, like session per visitor, new sessions per visitor, and bounce rate. I won’t go into detail about them because Google explains them well itself on Google Analytics.
CLTV OR CLV OR LTV = Customer Lifetime Value
The lifetime value of a customer, or customer lifetime value (CLV), is the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime.
It is very important data that allows you to evaluate, once your marketing efforts are done, if your customer acquisition and customer retention actions are profitable.
Customer LTV calculation = Revenue generated by a customer – cost of acquisition and retention of this customer.
It can be calculated in months, years, and in total for all your customers. But the formula is not the same.
Bransper the silicone jewelry brand, notes that Monica, one of their clients, ordered 2 times during 2020 and 1 time in 2019.
The order amounts are $40, $40 and $30 for a total of $110.
When asked, Monica said that she made her first purchase by clicking on a Google ad. Then a few months later she saw a Facebook ad that made her buy a second time and finally the third time after receiving an email with a discount coupon.
Bransper calculates the costs per purchase each year, for each and every acquisition channel. So the brand knows that on average:
Cost per purchase with Google Ads in 2019 = $10
Cost per purchase with Facebook Ads in 2020 = $17
Cost per purchase with Emailing in 2020 = $7
So, the Cost to acquire and retain this customer = $34
The total cost per acquisition of this customer should be $10 because that’s what it cost Bransper to convert Monica into a customer the first time. Nevertheless, the brand knows they have to spend more to target her again on Facebook. And the emailing software costs some money so the customer retention cost is at $24.
Monica’s LTV = $110 – $34 = $76
How to improve CLTV?
As you may have noticed, customer acquisition has a lot of value because you generally have less difficulty reselling to a customer who has been satisfied with their purchase experience.
Customer satisfaction is the main focus of LTV
It is highly recommended to deliver a product that brings value to customers and satisfies them because if they have the opportunity, they will come back. Or, you make them come back ;).
This is the most important thing to remember here.
The KPIs in digital marketing are only a reflection of the performance but to improve significantly, it is the whole business model that must be optimal.
In particular, the back-end that we don’t see, a friendly, available and reactive customer service, and efficient supply chain for the best customer experience.
This will allow you to make a difference in the long run, to optimize your margins and build a sustainable brand.