ROAS Isn't an Advertising-Only Metric
Why a low AOV is a bigger problem than your PPC Agency
Introduction
One of the major keys to growing your Amazon sales is scaling your PPC campaigns. Most sellers will use ROAS to measure the efficiency of their campaigns. While sellers spend a lot of time adjusting bids and testing different keywords that is only half the battle.
The problem that sellers experience is considering ROAS as an advertising-only metric. In PPC, you can control keyword targets and bids, but conversion rate and average order value are outside of the advertiser's control.
In this post, I’ll explain why ROAS performance has less to do with PPC management and more to do with pricing and conversion rate.
What is ROAS?
Before we start to explain how to improve your ROAS, we first need to understand the metric. ROAS stands for Return on Ad Spend, and you calculate the metric by dividing your ad-attributed sales by your ad spend. If you spend $10 and drive $40 in sales, your ROAS is $4.
ACoS or Average Cost of Sales is the other popular metric that sellers use to manage their advertising. ACoS is the inverse of ROAS and measured a percentage1. If you spend $10 and drive $40 in sales, your ACoS is 25% — Said differently ACoS shows the percentage of revenue you are allocating to advertising.
The reason why sellers focus on ROAS2 is to ensure they are driving profitbale sales. To calculate your breakeven ROAS, take 1 divided by your net profit percentage. If you have a 25% profit margin and take 1/.25 you will need to have $4 ROAS to breakeven.3.
Breaking Down the Metrics
Traffic
Generating traffic to your ASIN is the first step in scaling your business through PPC. When you analyze the levers available to drive traffic there are three areas to address.
Budget: The larger the budget, the more clicks your campaign will be able to generate.
Bids: Aggressive bids will lead to better placement within the SERPs. Better placement within the SERPs leads to more clicks and traffic.
Targets: Targeting high search volume keywords means your ad will show more frequently than less popular search terms. Assuming your click-through rate stays constant, this will lead to substantially more clicks.
Whenever you are optimizing towards a ROAS goals it’s better to start slow and keep your bids, budget and target list low. As you start to generate sales above your ROAS goal, start to expand your keyword list and increase your budget.
Cost per Click
While target bids are within your control, CPCs are a function of supply and demand. Supply is the amount of sponsored listing available and demand is the number of other sellers competing for position.
Rising CPC’s is one of the biggest challenges that sellers are facing. In most categories, CPCs have skyrocketed since the beginning of the pandemic and continue to make it harder than ever to generate profitable sales.
Let’s use the Q2 2022 CPC increase to show the impact that cost increases have ROAS. By the fact that CPCs have increased by 8% Y/Y our return declined by 7% versus last year. The result of this is that you need to drive an 8% improvement between AOV and conversion rate to keep revenue flat to last year.
Conversion Rate
PPC has some influencer over conversion — . if you are selling collagen and are bidding on the term “beauty” you will have a lower conversion rate than the term “collagen supplement”. Yet this example is a marginal case.
The most common example I see is conversion rate is low for all traffic. If your conversion rate is low4 and does not show much variability the problem is not your PPC campaigns, it's the listing itself.
To improve your conversion rate you need increase customer confidence in your item. How do you do this?
Test new images: The human brain processes images 6-60x faster than words. That means customers already have an opinion of your listing before they read a word of sales copy. Use PickFu to test multiple version of creative that show the benefits of your product and your conversion will improve.
Address negative reviews: Customers don’t trust brands, they trust other customers. If customers leave negative reviews you will need to course correct by identifying the root cause of the problem. This is not a quick fix, but will be critical to improving conversion. Example: If your collagen powder is spilling during shipping, work with your manufacturer to find a new seal for the product.
Optimize the A+ Content: Like your product images, the key to improving your A+ content is testing. Great A+ content reinforces the product benefits and highlights a brand story. Was your brand founded because your child needed a better bottle? Great - put that in your A+ Content.
AOV
Of all the metrics we covered, average order value is the hardest and most critical to improve. Not only will increasing AOV allow you to improve ROAS, it will help you deal with increasing CPCs for months to come.
There are 3 main ways to improve AOV.
Increase your prices: This is the most straightforward approach. Conduct a pricing analysis of your competitors and adjust your price to be at the top of the range. Not sure of where to start? Start with a 5% increase and keep increasing until you see conversion decline.
Up sell: If you have multiple sizes of the same item, merchandise them as variants on the detail page. You will be surprised at how many customers trade up to the larger size.
Bundles and value packs: If you don’t have the means to produce a different size, you can accomplish the same goal by bundling two of the same item. Goli has made this a core aspect of their strategy.
Conclusion
When analyzing PPC performance it’s important to look beyond the advertising metrics and take a holistic view of performance. By taking a holistic view of performance you will be focusing on improving the total business and positioning the brand to scale in a big way.
It is the default view Amazon’s Ad Console
or ACoS
Next post will be on developing a pro-forma model to manage your profitability
Less than 12-15%
great tips!