Sep 18 Setting Actionable Facebook ROAS Benchmarks for E-commerce
In experimenting with our own e-commerce platform, we thought long and hard about what these targets should be and how we should determine parameters for spend, optimization, and profit. From this, we put together a few calculations to help you determine what ROAS benchmarks are best for your company. Disclaimer: this approach assumes you are running Facebook ads driving purchases of specific products and is not entirely applicable if you’re running dynamic ads (though if all your products’ gross profit margins are similar these could serve as ballpark estimates or you could combine your sales data with your ads data for cumulative, adaptable ROAS benchmarks, but that’ll be a post for another day).
How Facebook Measures ROAS
When the Facebook pixel passes purchase data to Ads Manager from your e-commerce platform it provides the total purchase price of the product sold. This value includes profit, but it also includes the cost of the product itself. You’ll want to adjust your ROAS targets to take these costs into consideration. These calculations will also help with planning, understanding how many products you need to sell in order to reach a profit target, and how much you’ll need to invest in ad spend in order to reach that target.
Calculating Social ROAS
At face-value Facebook ad buyers might view any ROAS above $1 (1:1) to be successful. This number, of course, is misleading and only a fraction of the story. A common, industry-accepted ROAS benchmark is 4:1 ($4); however, every business is different.
Let’s create an example product: The Social Media Is A Cocktail Party martini glass featuring Jim Tobin’s face engraved on the side (again, this is a made-up example product, but if enough people comment to say they want one, we might make it happen… you never know). Let’s say it costs $10 to make and retails for $15.
However, you’ll need a ROAS of $3 to break even when considering both product cost and ad spend.
If you want to generate a gross profit margin of 10%, you’ll want to target a ROAS of $3.34.
A more-aggressive target of 75% gross profit margin will push that ROAS target to $12.
Say you have a profit goal of $5,000 on these martini glasses. You’ll need to sell 10K units with a 10% gross profit margin target.
Or 1,334 units with a 75% gross profit margin.
It should go without saying that you’ll need more ad spend if your ROAS is performing at $3.34 versus $12, so it pays (literally) to efficiently create, target, and optimize your ads.
On the low end, if your ROAS is running at the 10% gross profit margin, you’ll need to invest $45K in ad spend.
Alternatively, if your ads are more-efficient and you’re running at the 75% gross profit margin, you’ll only need to invest $1,677.50 in ad spend.
The moral of this story is: know what your ROAS needs to be and optimize your ads to reach that target.
For your reference we’ve included several calculations based on the constants you’ll have available in several scenarios.
You have a profit target (x) and gross profit margin (p), how much ad spend (x) will you need for your campaign (y)?
Inputs: Purchase Price (a); Product Cost (b); Profit Target (x); Gross Profit Margin (p)
How many units (u) will you need to sell?
You have a set ad spend (y), how much profit (x) can you expect to make based on set spend and a set gross profit margin (p) with that ad spend included (p)?
Inputs: Purchase Price (a); Product Cost (b); Ad Spend Budget (y); Gross Profit Margin (p)
You have a set ad spend (y) and your campaigns run a consistent ROAS (r), but you want to know what your gross profit margin is with that ad spend included (p):
Inputs: Purchase Price (a); Product Cost (b); Ad Spend Budget (y); ROAS (r)
How much profit can you expect? See Scenario 2.
Once you have a ROAS benchmark you’re comfortable with, you can build a campaign in ads manager and set it up with a minimum ROAS control. Don’t set the ROAS minimum too high, otherwise the ads will stop delivering. If you encounter this issue, consider adjusting your expected gross profit margin, balancing it with your available spend and available units.