Return on ad spent is total revenue generated out of the every dollar you spent on advertsising. It can be calculated as revenue divided by total budget.
Your Amazon return on ad spend (ROAS) is the profit you make for each dollar spent on an ad campaign. Amazon ROAS is the answer to the question, “If I spend a certain amount on advertising, what will I get back as profit?” The metric is found under Advertising > Campaign Manager.
The formula to determining ROAS is total sales decided by total spend. Amazon presents this figure as an index rather than a percentage.
For example, if you spend $300 on advertising and earn $3000 in revenue, your ROAS (3000/300) would be 10. This figure indicates that, for each $10 you make, you are spending $1 on advertising. The higher your ROAS, the better your performance.
The ROAS metric can be incredibly useful if you know how to use it. Because it’s a direct measurement of your revenue compared to your spending, you can use this figure to determine whether your ads are generating revenue. If your ROAS is low, your ads are not particularly effective.
A low ROAS should act as a signal that your marketing campaign needs to change. For instance, is your keyword selection not sufficient? Should you work on keyword targeting?
The answer depends on your product’s profit margins. If you consider the cost of shipping, Amazon fees, and production, and compare these figures with your monthly profits, you will get an idea of your profit margin.
Let’s say your monthly costs are $100, and your monthly sales equate to $50. The profit margin is negative $50. If you have a deficit, an ad campaign can help you make up the difference.
In this case, you will need an Amazon ROAS of around 5 in order to get rid of your deficit and make a profit from your advertising campaign. A smaller profit margin requires a higher ROAS in order to be successful.