Zach Oldham breaks down seven ROAS metrics for scaling e-commerce ads: basic ROAS, channel-specific ROAS, ROI, MER, blended ROAS, gross breakeven ROAS, and POAS. He argues that 2-4x ROAS with efficient spending beats chasing 5-10x targets.
In this video, we will go over different types of ROAS metrics and what they mean. This video will be extremely useful for anybody interested in digital marketing or anybody running ads of any kind. For the past several years, I've run Flax Labs, a scientific marketing agency, and over that time I've picked up a few digital marketing skills as we've scaled our clients to 7 figures and beyond. If you are a digital marketer or you're interested in digital marketing, you need to grasp the concept of ROAS. There are lots of different types of ROAS that we look at at FlaxLabs, not just the typical return on ad spend. So let's go over them and actually break those down. When we first started advertising, ROAS was the only return metric that we were looking at to monitor performance. We quickly learned that that was not the best way to be measuring the effectiveness of our advertising campaigns. To begin, normal ROAS, or just return on ad spend, is the most basic of all of these metrics that I'm about to cover. This is simply the return that you're seeing on your ad spend. So this will be tracked separately across different platforms, and you can find this number by dividing your tracked revenue by your ad spend on the platform. For example, if I spend $5,000 on TikTok ads and TikTok tracks $15,000 in revenue, my return is When you're looking at ROAS, you must realize that there are different channels that have generated this return. Let's take a look at what that might look like for somebody running ads on Facebook. For example, your website ROAS will only track purchases that are collected through the website pixel. Your on-Facebook ROAS will only track purchases that are made through the Facebook or Instagram shop, and your offline events ROAS tracks purchases manually or through automation tools like Zapier. These are purchases that are manually uploaded or automatically uploaded back into Facebook. Last but not least, on Facebook, your total ROAS is all of these combined. If I have a 2 ROAS coming from my IG and Facebook shop, I have a 3 ROAS on my website and a 1.5 ROAS on my offline ROAS. All of these will be combined and my purchase ROAS number that Facebook tells me will be a 6.5 return. Most people strive for a 5 to 10x ROAS in e-commerce, but that can be a misguided goal. Most e-commerce companies can be profitable with a 2 to 4x ROAS, and the extra effort needed to push it higher isn't necessary. Instead, it would be better to spend time focusing on scaling and increasing budgets and visitors on your website than increasing the return, as that will actually lead to more profit. The next ROAS-type metric to cover is return on investment or ROI. This is a metric that isn't only used when advertising, but it's also used in general life. You hear the term return on investment used for not only financial purposes, but also in terms of time, effort, work, or any other number of different inputs. A good general way to think about return on investment is the benefit that you will get from a certain input. The next metric is your marketing efficiency ratio or your MER. And your marketing efficiency ratio is your total revenue divided by your total spend or your total advertising/marketing spend. This metric is very similar to the next metric. In fact, pretty much identical to the metric blended ROAS that I will discuss in a moment. Your MER will give you a total overview of the general marketing health for your company. It's usually, and not in all cases, but it's usually displayed as a percentage and acts as a complete overview for one's marketing efforts. Now, your blended ROAS is pretty much identical to your MER metric. Blended ROAS again is your total revenue divided by your total spend. Although this is often platform specific. Let me elaborate. Some companies have incredibly high blended ROASs because they get the majority of their traffic through organic methods, resulting in the lower spend. And similar to MER, this metric is effectively a judgment of the entire business's advertising success. These next two ROAS metrics are quite key and very useful, and we use them a lot at Flax. And these are breakeven ROAS and your gross breakeven ROAS. These metrics show the ROAS that you need to break even. We call it GB ROAS, and it tells us the minimum ROAS needed to cover our costs. This takes into account all of your gross costs, which include things like COGS, shipping and handling, payment processing fees, and even taxes. This number will show you how much you need to make on your ROAS to break even. So what multiple you need in order to break even off of your ad spend, for example, a 1.5, would break even. Okay, for every dollar I spend, I need $1.50 back in revenue. Anything above this number is gross profit and increases your net income, and that's what you're aiming to maximize. So if your gross break-even is a 1.5 and you have a 3 ROAS, then you have a 50% profit margin. Another interesting metric we look at is POAS, or profit on ad spend, and it's essentially your total ROAS minus your GB ROAS. So like I just described, if you had a 3 ROAS and your gross break-even ROAS was 1.5 ROAS, then your POAS would be a 1.5 and that's your profit on ad spend. So for every dollar I spend, I get $1.50 in profit. It's a relatively self-explanatory metric and shows you how much profit you're making on each of your ads. All in all, it's a great way to get an idea of the money that you're making with each ad set. Last but not least, your new customer ROAS is another important and self- explanatory metric. This will show you how efficient your ads are at bringing you new customers. If your ad spend is overly focused on bringing in new customers instead of retargeting, then there could be an issue, as getting new customers is usually very expensive. Now that we've gone through all 7 different types of ROAS that we look at at Flax, you should have a better idea of how your ads are performing. If you want a free 30-minute consultation on your ads, reach out through my contact methods in the description and we will set that up. Have a good day.
