If you are selling products on Amazon, you’ve probably considered running ads on their ad platform. We’ve had the pleasure of scaling Amazon Ads for several of our eCommerce clients, and wanted to address a critical question that comes up all the time: What is a good return-on-ad-spend (ROAS) on Amazon?
In this article, we will take a deep dive into the concept of ROAS and what constitutes as a good multiple on Amazon.
Understanding ROAS:
Return on Ad Spend (ROAS) is a metric used to evaluate the efficiency of your advertising investment. It measures the revenue generated from your ads relative to the amount spent on those ads. ROAS is expressed as a ratio or multiple.
For example, if you spent $100 on Amazon Ads and generated $500 in sales, your ROAS would be a 5x. A higher ROAS indicates a more profitable campaign, as you are generating more revenue for every dollar spent on advertising.
Factors Influencing Your ROAS on Amazon:
There are a lot of different factors that can influence your campaign’s ROAS. Understanding these five factors will help you set realistic expectations and optimize your campaigns effectively.
1. Product Profitability
The profitability of your product plays a significant role in determining the ROAS you should aim for. Higher-margin products generally allow for a better ROAS, as there is more room to cover advertising costs while still generating profit. For example, if your average order value is $100, you can spend up to $20 on advertising to convert a sale to earn a 5x. If your average order value is $20, you can only spend $4 on advertising to earn a 5x.
2. Ad Relevance & Quality
Creating targeted and relevant ads is important for maximizing your ROAS. You need to ensure that your ads align with the keywords you’re bidding on. Additionally, make sure the product listing uses language that is enticing to people searching for your keywords. Highly relevant and engaging ads on Amazon can expect higher conversion rates and boost ROAS.
3. Bidding Strategy
Amazon’s advertising platform utilizes a bidding system where you set the maximum you’re willing to pay for clicks or impressions. You also choose whether or not Amazon has the flexibility to increase or decrease these bids. Your bidding strategy needs to strike a balance between competitiveness and profitability. You should experiment with bid adjustments, such as increasing bids on higher-converting keywords and also keep your eye on “share of voice metrics”. This will tell you the percentage of search queries you appear in.
4. Conversion Rate Optimization
Optimizing your product listings and detail pages to improve conversion rates is crucial for achieving an ever-improving ROAS. Ensure that your product descriptions are clear, your images are appealing, your customers are leaving positive reviews and your pricing is competitive. Each of these individual items can impact your ROAS.
5. Seasonality and Competition
The time of year and level of competition can impact your ROAS, and cause fluctuations throughout the year. During peak shopping seasons, or when faced with high competition, you may have to spend more to get in front of your ideal customers.
Other Factors to Consider
How often do your customers repurchase from you?
If you know that 50% of your customers are coming back after their first order, you can get a better idea of what you can afford to pay to acquire new customers. You may be more comfortable accepting a lower ROAS up front, knowing that they will more than likely be back for more orders in the future.
Branded Vs. Non-Branded Terms
Are your competitors bidding on your branded terms and stealing your organic share of the market? If so, this can be fairly easy to combat. It will be less expensive for you to earn clicks off of your own branded terms than it will be for competitors to steal them from you. Take advantage of this. You should always expect a much greater ROAS from your branded terms, over your non-branded terms.
Be aware that non-branded terms will almost always come with a higher price tag than branded terms. Your CPC will likely be higher on non-branded activities, leading to lower ROAS metrics. At High Beam Marketing, we like to look at the average across all these activities as non-branded search ads typically help in increasing your branded search volume.
How does your industry perform?
Are you offering a fairly niche product, or are you going up against massive competitors? If you’re in the latter group, you may have a hard time affording the cost-per-click (CPC) bids in Amazon. The more niche your product offering is, and the more specific your keywords, the more likely you are to achieve that strong ROAS.
Amazon Takes a Big Cut!
Sale-related fees range from 8% to 45% of each product’s selling price - with the average seller paying around 15%. That is a lot of margin being taken directly from your bottom line. Your acceptable ROAS on Amazon might need to be higher than it is on other platforms like Google or Meta.
What constitutes a good ROAS on Amazon?
As you’re probably finding out, determining what qualifies as a “good” ROAS can be a bit more in-depth than you might’ve originally thought. Depending on your business, its goals, and the industry you’re in, a good ROAS might be between 3-5x. If certain factors, such as reorder rates and profit margins, are in your favor, you may only need a 1x!
At High Beam Marketing, we have a proven track record for driving strong results through Amazon Ads. To date, we have averaged a ROAS of 6.30x for our clients.
If you’re ready to dive into Amazon Ads and work towards identifying the right ROAS goal for your business, get in touch with us today!