Understanding Amazon ROAS: Calculation & benchmarking tips you need

A good Return on Ad Spend (ROAS) indicates that your Amazon advertising campaigns are working in your favor. However, when it comes to what a good ROAS on Amazon is, the metric to aim for can vary depending on several factors, including the typical profit margin for businesses in your industry, and the primary goal of your advertising campaign. For example, if you’re promoting brand awareness over a particular product or service, you’ll likely find that your ROAS is lower. That said, an Amazon ROAS between 3 and 5 is typical for most businesses.

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So, how important is ROAS and what exactly does it tell you about your pay-per-click (PPC) advertising campaign? Furthermore, how do you calculate it? Let’s dig in.

How is measuring ROAS on Amazon different?

ROAS is primarily calculated based on the platform’s proprietary data, which comes directly from Amazon’s user base and transactions. As one of the world’s largest e-commerce platforms (Yahoo Finance), Amazon sits on a wealth of detailed consumer behavior and transaction data that can’t be found anywhere else.

Every click, purchase, and product view generates valuable data that Amazon leverages to provide insights about customer purchasing habits, preferences, and trends. Amazon uses this data to leverage highly accurate customer targeting, enabling advertisers to reach their desired audience more effectively and efficiently.

Furthermore, Amazon provides advertisers with comprehensive performance data for their ads, including impressions, clicks, conversions, and sales. While the ROAS is measured relatively simply by calculating the ratio of spend to revenue gained from the advertisement, all of these other metrics go into determining an Amazon ROAS number that helps you achieve superior campaign performance and returns.

Why is it important to measure ROAS on Amazon Ads?

Measuring ROAS on Amazon is critical for several reasons:

• It facilitates an effective return on investment ROAS analysis for Amazon: Measuring ROAS gives you the power to quantify the probability of your advertising campaign’s success on Amazon. If your Amazon ROAS is high, it means your business is gaining a significant return from ad spend, thus validating Amazon as a profitable platform. Conversely, a low ROAS may indicate that your campaign isn’t working as expected and requires adjustment, whether that’s changing your goals, your digital marketing strategy, or the platform you’re using to advertise on.
• It provides insights into cost-effectiveness: Your ROAS gives you a clear indication of whether your ad spend is generating your desired returns in terms of sales and revenue. If your ROAS is low, it means your advertising costs are high compared to your generated revenue.
• It helps you optimize your budget allocation: ROAS can help you identify which ads are performing well and which aren’t, giving you the knowledge you need to reallocate your budget to maximize efficiency and effectiveness. This helps you make data-driven decisions instead of acting on instinct.

In essence, measuring ROAS on Amazon is a crucial part of building a successful marketing strategy. It provides you with valuable insights into the effectiveness of your campaigns and enables strategic decision-making, both of which are vital to maximizing your advertising investments.

How to calculate ROAS for Amazon Ads

In simple terms, you can use this basic formula to determine your ROAS for Amazon Ads:

ROAS = Revenue from Ad Spend / Cost of Ad Spend

While the metrics that go into determining this metric might seem complicated at first, once you have the numbers you need, the calculation itself is simple. You can determine if you have a good Amazon ROAS by taking the total you spent on a single advertising campaign and dividing it by the total revenue that came from that particular ad. For example, if you spent $1,000 on an ad and earned $10,000 in revenue, your ROAS would be 10x, indicating that every dollar you spend on ads is earned tenfold in revenue.

Calculating your minimum Amazon ROAS

To determine if your Amazon PPC advertising spend is worth it, you need to calculate your minimum ROAS, or your break-even Amazon ROAS. This break-even point is your gross profit before ad expenses, and it’s an important metric to help you determine if you were able to recoup the cost of making a sale.

To calculate this, take your sales price, cost of goods, and cost of Amazon fees and add them together to determine your minimum income from a sale, or your break even point. Now use the following calculation to determine your minimum Amazon ROAS:

Sale price / break even point = minimum ROAS

Tips and tactics for improving ROAS on Amazon Ads

Even if your ROAS is meeting your current marketing and advertising goals, it never hurts to aim higher. Take advantage of the following tips to achieve a good ROAS on Amazon Ads.

Product listing optimization

Improving ROAS on Amazon Ads often begins with optimizing your product listings. This involves enhancing the visibility and appeal of your listings to drive more conversions, which can be done through keyword research to identify relevant search terms that potential customers are likely to use when searching for similar products. Incorporate these keywords strategically into your product titles, descriptions, and backend search terms.

High-quality product images also play a significant role in attracting potential customers. Images are usually the first impression customers get of your product, so they need to be clear, professional, attractive, and accurate. Finish your product listing with compelling product descriptions that accurately describe the product’s benefits. This should quickly improve your conversion rate.

Utilize ad types that suit your goals

Amazon offers several types of ads, each with its own set of strengths. For example, Sponsored Product ads are excellent for boosting product visibility while Sponsored Brands ads can make more people aware of your company and what you do in general. To optimize your Amazon ROAS, it’s essential to align your advertising goals with the right ad types.

If your primary objective is to increase product sales, Sponsored Products ads might be the best choice as they target customers who are online and ready to purchase. If you’re looking to increase brand recognition, Sponsored Brands ads display your logo alongside a selection of your products at the top of search results.

Understanding the capabilities and purpose of each ad type and matching them to your goals is one of the simplest ways to optimize your advertising spend and improve your ROAS.

If you want a good ROAS on Amazon, use exact match bids and negative keywords to attract more conversions.

Exact match bidding allows you to target specific keywords that are most likely to convert shoppers in to buyers. This strategy typically leads to a higher click-through rate and improved conversion, both of which can increase your ROAS.

Negative keywords help you exclude search terms that aren’t relevant to what you’re selling. By defining what your product isn’t just as well as you’ve defined what it is, you can avoid wasted ad spend on uninterested audiences and as a byproduct, improve your ROAS. If you’re using negative keywords, though, remember to review and update them regularly to ensure your strategy remains effective.

Inventory management

Effective inventory management is a crucial part of maintaining consistent ad visibility and avoiding missed sales opportunities, both of which are key to optimizing ROAS. When your product is out of stock, your ads stop running and that can quickly lead to lost sales and a decrease in your ROAS.

To prevent this, ensure that your inventory levels are properly managed. Monitor your levels closely and set up alerts to keep you informed when stock starts to run low, so you can collaborate with your client and they can order more before it’s out. Alternatively, recommend an automated inventory management system to maintain optimal stock levels at all times. This strategy helps to ensure continuous product availability and as a result, a high Amazon ROAS due to consistent ad visibility and increased sales.

Review and ratings management

Reviews and ratings can significantly improve your product’s perceived value and that can directly influence your conversion rates, and thus help you achieve a good ROAS on Amazon. Encourage customers to leave positive reviews and ratings to help improve product and brand credibility.

Active review management is a crucial aspect of this process, too. It involves responding to both positive and negative reviews in a timely and professional manner. Handling negative reviews constructively helps you turn a potentially damaging situation into an opportunity to demonstrate your brand’s commitment to customer satisfaction. This helps you maintain a positive brand reputation and builds trust with potential customers, leading to higher conversion rates and an improved Amazon ROAS.

Create promotions and advertise them often

Promotions play a critical role when it comes to obtaining a good ROAS on Amazon Ads. Discounts such as percentage-off deals and promo codes can quickly draw in potential customers by offering them a more appealing deal than they’d normally get. This added incentive can also help to stimulate sales by convincing undecided customers to purchase or b encouraging impulse buys.

Promotions can also increase the perceived value of your products, making customers feel liek they’re getting a bargain and a positive shopping experience. This, in turn, often leads to repeat purchases and positive reviews, further increasing sales and improving your Amazon ROAS.

Leverage contextual targeting

Contextual targeting is an Amazon Ads product that helps brands improve their reach through signal-based marketing. This new advertising method has helped Amazon brands see a 66% increase in new audiences and a 45% increase in reaching previously unaddressable customers (Amazon).

This innovative advertising method provides consumer packaged goods businesses with the opportunity to get their brands in front of consumers without mobile ad IDs or cookies. Instead, it relies on Amazon’s sophisticated data and algorithms which use user behavior, past purchases, viewed products, and search terms to determine which advertisements are most likely to receive the user’s attention.

Contextual targeting can result in higher click-through rates and increased conversions, and of course, this quickly helps brands to improve their ROAS for Amazon.

Increase your AOV

Your average order value (AOV) is an important element of your success on Amazon, and increasing this number can contribute to a potent strategy to developing a good ROAS on Amazon. Your AOV refers to the average amount of money each customer spends per transaction on your products. A higher AOV means more revenue per customer, and that directly results in a higher Amazon ROAS.

There are several ways you can increase your AOV and the most powerful is bundling, or grouping together multiple products for a slightly reduced price when compared with buying each of the included products on their own. Customers perceive bundles as getting more value for their money and many will see it as an incentive to spend more.

Upselling and cross-selling can also help you to increase your AOV. Upselling means encouraging customers to buy a higher-priced version of the product they're considering, typically in exchange for better or more features, while cross-selling encourages them to purchase complementary products. Amazon facilitates both of these marketing strategies through its “Frequently Bought Together,” and “Customers Who Bought This Item Also Bought,” menus on product pages.

Also consider incorporating free shipping on higher-value orders and customer loyalty programs to up your AOV and consequently, your Amazon ROAS. These programs can encourage shoppers to buy more per transaction and build repeat business for your brand.

Frequently asked questions

Are there differences in ROAS benchmarks based on product categories or industries on Amazon?

Yes and this is largely because different industries have distinct market dynamics, consumer behaviors, and competitive landscapes which influence the ROI of advertising efforts. For instance, products in a niche category with less competition are likely to achieve a higher ROAS compared to products in a highly competitive category with numerous similar offerings. Other factors such as product price, profit margins, and sales volumes also influence ROAS benchmarks.

What are the potential implications or consequences of having a low ROAS on Amazon?

A low ROAS on Amazon could indicate ineffective ad campaigns, and that can be due to a variety of factors. This includes suboptimal design, improper keyword use, or inaccurate audience targeting. This low ROAS can negatively impact profitability and could, over time, necessitate a reevaluation of your overall digital marketing strategy. If Amazon Ads are underperforming consistently, it might indicate that the platform isn’t suitable for your products or target market.