How to Set ROAS/ROI Targets For Your eCommerce Business on Facebook Ads.
Facebook ads are an automatic go-to for eCommerce businesses these days, especially in the post COVID economy, to acquire new customers at a manageable CPA (Cost per Acquisition) and generate an ongoing stream of online sales. However, many businesses take the leap and start running ads without taking the time to define their success measurement. They rely on gut instinct to measure impact., rather than predefined objective metrics. “We just wanna get some sales”, they often say.
Generally this scenario yields one of two unfortunate outcomes:
They keep going haplessly without a clear path to growth or scale, and miss a myriad of opportunities
Or, they abandon Facebook ads altogether because they don’t “feel” it’s working.
The reality is that when it comes to performance media, subjectivity is the mother of all evil, and “feelings” shouldn’t come into it. A clear defined numeric target is the antidote.
So how do you set a target for your Facebook eCommerce ads to ensure you are making the most of your spend and not losing money? Here are a few simple steps:
The Budget:
Setting a budget shouldn’t be a stab in the dark. Spending $5k, $10k or $100k is neither cheap nor expensive. It’s all relative and entirely dependent on business objectives and outcomes.
There are two key factors to consider when deciding what to spend on ads:
Think about how much you would spend to acquire a single customer and what that customer’s lifetime value might be, then think how many of those you want to get.
Think about what the cost of having a fair go at Facebook ads would be. You can extrapolate that by understanding the size of your audience pool on Facebook, the cost of delivering ads in their feed, the optimum frequency to drive action and the appropriate amount of people within that people that you want to reach and test ads against.
No, dipping your toes in the water with a couple of hundred bucks doesn’t cut it. You don’t scratch the surface with that amount. You don’t even have the surface in sight. Just because Facebook would happily take your money no matter how small doesn’t mean it’s the right thing to do.
No, your ad spend doesn’t have to be a certain percentage of your turnover, especially before you achieve performance stability and consistency from your ads. I’ve seen businesses re-invest 5%, 25% and even 100% in advertising every month. I’ve seen startups invest for many months before making any money. There is no magic formula, no one-size fits all. It is entirely dependent on the size, stage, scale and objectives of the business.
The ROAS Equation:
Luckily, we live in a time where a medium like Facebook can track dollar for dollar what you spend in ads and what you generate in eCommerce cart value on the back of it.
Platforms like Shopify have sophisticated data sharing partnerships with Facebook that allows them to meticulously measure spend and returns through tracking tools like the Facebook Pixel and the Facebook Conversions API.
So how do you set a ROAS target? Here’s a simple equation:
1 ÷ decimal margin = breakeven
So, it your margin on goods sold online is 40%, then:
1 ÷ 0.4 = 2.5
This means that you need ROAS of 2.5 on eCommerce Facebook ads to cover your COGS (Cost of Goods Sold) and cost of advertising on Facebook. Bear in mind that Facebook ROAS is based on eCommerce cart value so it is inclusive of GST but exclusive of shopping cost
If you have additional costs such as creative, agency fees or overheads, then those too need to be imbedded in the equation.
From there, you can decide what ROAS should actually be your target. For instance, you may break even at 2.5x, but want a minimum of 5x to drive 100% gross profit.
Comparable Media:
Just like setting your budget, setting your ROAS target should not be a stab in the dark. While calculating your breakeven can be done easily using variation of the equation above, deciding on the actual margin of success can be tricky.
The easiest place to start is benchmarks from other media or even existing sales initiative that you use to acquire customers and generate sales. Here’s a couple of examples:
If you run other performance media like Google ads, a ROAS benchmark will be there already. (caveat: if you run SEM, bear in mind that CPA of search marketing can be deceiving when compared to discovery marketing like Social, because one is delivered to a customer with pre-existing intent, the other is not)
If you run a sales operation, say you’re a tour operator who pays commission to travel agents who bring in customers, that too can be modeled into a cost per acquisition benchmark that can compared against acquisition through ads.
There are endless examples, but you get the gist.
Strategic Discretion:
As with anything else, there’s a level of discretion involved from the business on how to budget, what to measure and when to scale. Here are a few examples we’ve seen over the years:
A business may determine to use Facebook ads as a customer acquisition channel, rather than a channel to generate immediate profit. For instance, a business that has high customer LTV (lifetime value) may decide to set a target such as breakeven ROAS or even less, because they deem acquiring a new customer, albeit expensively, as a long term investment with an acceptable front-weighted loss.
A business may operate their Facebook ads on pre-determined performance milestones. For instance, if ROAS is between X and Y, keep going, if ROAS is above Y, upweight spend by 50% and if ROAS is below X, abandon ship. This is what we often call Zonal Performance (more on that on another day).
A well established business may deal with their Facebook ads investment as a mini startup within itself, reinvesting all returns in creative and data initiatives as well as ad spend in order to grow it almost independently as a self-sustainable revenue stream.
A business may use Facebook ads only as a testing platform, for instance for new product releases or when entering a new market.
I could go on forever here…
Final Thought:
The bottom line is, you’re in control. Facebook and Instagram advertising has to play right into your hands and ladder up to your business objectives and expectations, not the other way around.
The most important lesson we’ve learned over the years is that a race without a clock is not a race worth running. Setting clear measurable targets is the number one, no compromise prerequisite to success, growth and scale.
Happy advertising!
Mike Adly
Founder @ Return Media