You really can’t do better than Facebook and Instagram when it comes to advertising your e-commerce store.
Last year the two platforms accounted for over 90% of the total social referral traffic to US e-commerce sites. But even though over 8 million advertisers were running ads on the platform as of Q4 2019, none of this guarantees YOUR Facebook and Instagram ads are going to be successful and turn a profit.
For anyone running Facebook and Instagram ads it’s critical to be tracking your store’s metrics and frequently checking your store’s overall profitability.
To do this you need to know how to calculate the two most important metrics for e-commerce marketers: Calculate your Return On Ad Spend (ROAS) and your overall Return On Investment (ROI).
How to calculate your ROAS
Let’s take a look first at how to calculate your ROAS since the calculation requires less information. If you have correctly set up your e-commerce store’s Facebook Pixel, you should be able to get all the information you need straight from your ad manager account.
As the formula above describes, you simply need to divide the total revenue earned as a direct result of your Facebook and Instagram ads, by the cost of the ad campaign. The revenue is tracked by Facebook so you should only need to calculate the cost of the ad campaign.
To make sure this calculation is accurate you need to include any additional spending you may have done when creating the campaign. For example, if you hired a professional product photographer, contracted an agency, or paid for any other possible ad services.
The result of the calculation tells you how much money you are making in ratio to the money you are spending. If the figure that results is less than 1, you’re spending more than you are making. If your ROAS is 2, you are earning a 2:1 ratio of return on your ad spending.
For every $1 of ads you purchase you get $2 back (but remember, this doesn’t take into consideration any other costs other than the ad spend).
ROAS ratios are also commonly discussed as %s. To turn your ROAS ratio into a % you simply multiply your result by 100. The above example would have a ROAS of 200%.
How to calculate your ROI
To calculate the ROI for your e-commerce store you will need to gather a bit more information. This is because you will need to accurately sum all the various costs associated with running your online business.
That means including the variable costs directly related to the products sold. This should include any shipping fees, packaging, ad spend, and any other costs you incur that increase and decrease depending on the number of items sold (i.e. don’t include fixed costs).
Check out our free ROI calculator*
Once you’re confident you’ve collected the correct total revenue and total variable costs related to the product, simply subtract your costs from your revenue, divide by your costs.
If you want to discuss your ROI as a ratio then you are good to go. But if you want a % then multiply that baby by 100, slap a % sign on it and call it a day.
If the figure is negative, your store is not generating net revenue, and you are in fact losing money. Otherwise, if the figure is above 0, you have recovered your costs and you’re making a profit.
We have an easy to use free ROI calculator that simplifies this calculation for you and provides some additional insight into the performance of your campaign.
Beyond ROI: calculating your Break-Even CAC and CPC
Although your ROAS and ROI are incredibly important calculations to understand how well your e-commerce store is performing, there are two more related metrics that can be extremely helpful for anyone running advertising campaigns: the Break-Even CAC (Cost-to-Acquire-Customers) and CPC (Cost-Per-Click).
By calculating your Break-Even CPC and CAC, you discover the maximum amount you should spend Per Click and Per Acquisition in order to generate positive ROI. Our free ROI calculator also functions as a Break-Even CAC and CPC calculator, so definitely try it out.
E-commerce advertising benchmarks
Once you have calculated your e-commerce store’s ROI and ROAS it’s a natural next step to want to compare your results with established benchmarks. Unfortunately, deciding what is an acceptable ROAS is not as cut and dry as one might hope.
Every business has different overhead costs, profit margins, and are experiencing different stages of growth. New stores that will need to invest more in gaining visibility and entering the market are naturally going to have lower ROI and ROAS as they begin to attract their first customers.
However, I will mention here a few commonly cited benchmarks. Many in the e-commerce industry still make reference to an extremely old report based on data from 2004-2015.
This states that the average ROAS for e-commerce businesses is about 287%. Meaning for every $1 spent on advertising, companies make $2.87. ( But take this figure with a pinch of salt and a slice of lemon).
There is also a general consensus that 400% ROAS, or $4 revenue generated for every $1 spent on ads, qualifies as a good ROAS.
Even more important than comparing your results to external benchmarks is the process of establishing your own benchmarks over time and ensuring that your activities are helping you reach your own business goals.