How to set your target ROAS and CPO to optimize profits?

If you clicked on this article, then you probably know what ROAS and CPO are, but just in case, here it goes.

ROAS (return-on-ad-spend) and CPO (cost-per-order) are two most common performance indicators that e-commerce advertisers use when evaluating their results. They basically tell you how your ads are performing, focusing on advertising cost.

We have already explained why having a target ROAS and a target CPO is crucial for performance marketing. In case you missed it, click here.

Now, let’s discuss how to set them properly.

Target ROAS and CPO are always-changing live numbers

Therefore, you cannot simply come up with those values based on your gut feeling. You’re running a business here, not ordering takeout. You need to consider all kinds of factors in order to find a target that marks where you break even, meaning: whether you are making a profit or a loss. Also note that you might need to change your targets as some other factors change in your business. But we’ll get to that later.

How to calculate your target CPO?

Target CPO is the maximum price per order you can afford to spend for advertising while still making a profit.

To calculate your target CPO, take the retail price of your product, and deduct wholesale price, shipping, tax, packaging, uncollected packages percentage and all other costs that are connected to the product. What you are left with is your target CPO.

For example, let’s say you sell an item for $100. After deducting all the expenses relating to the product, you are left with $20, which means $20 is your max CPO. If you spend more than that per order, you are making a loss.

But what about profit? Shouldn’t you gain some money as well?

Yes, you should and you will. With target CPO set, you know which campaigns you need to tweak, shut off or scale. By doing that, you will start to bring in more orders and that is where your profits will start to show.

Remember, most e-commerce companies make the most of their profits when scaling. If you absolutely want to be on the safe side, you can deduct a couple of $ off your target CPO, but be careful as this can affect your ad optimization in a major way.

How to calculate your target ROAS?

Your target ROAS tells you how much value you need to receive for every dollar spent on paid ads in order to make a profit. The formula is simple:

You must know your AOV (average order value) and target CPO. After that, you divide your target CPO with your AOV.

For example, let’s say your average order value of a product is $40 and your target CPO is $10. By dividing AOV with CPO, you are left with a target ROAS of 4.

Why AOV and not retail price?

You can use retail price instead of AOV, no problem. But that won’t include orders with multiple items, upsells, product bundles etc.

For example, if your retail price is $30 and your target CPO is $10, your target ROAS is 3. But some people might order more than 1 of those items and by not considering the AOV, you are setting your target ROAS too low. If your AOV is actually $40, then your target ROAS is not 3, but 4!

Big difference!

Think about all the campaigns with a ROAS between 3 and 4 that you would previously turn off. By using AOV, you now learnt that those are actually making you a profit. Cha-ching!

Which target should I use?

That’s a tricky question and the answer depends on each marketer. But what we can tell you, is that ROAS is somehow superior to CPO. Cost-per-order is super useful for measuring large volumes of orders, but it only measures the average cost of each action (in your case, purchase).

Allow us to explain.

If you spend $10 of your ad budget to get 1 conversion, your CPO is $10. Cool, but see this:

  • if your product costs $5, your ROAS is 0.5
  • if your product costs $30, your ROAS is suddenly 3

Same CPO, dramatically different ROAS.

Unlike CPO, ROAS also considers the value of each conversion, which affects how you set your targets and optimize your ads.

When should you consider adjusting your ROAS and CPO?

Using a general target ROAS and CPO is a great start. However, you might quickly notice you need to set those targets for each product on each shop. Since there are always changes present in the e-commerce world, you might need to consider adjusting your target ROAS and CPO when:

  • there is a change in the wholesale price of a product
  • you are ordering in bulk and receive a discount
  • the amount of uncollected COD packages changes
  • you notice that a product sells in bundles and the average order value is high

What we’ve learned:

  • When advertising multiple products, you need a way to rate the success of each one
  • By setting your target ROAS and CPO, you know exactly where you are making a profit or a loss
  • Don’t forget to consider your AOV, since it can affect your targets
  • Regularly check and adjust your targets, so your ad budget has more wiggle room

Now, you are probably wondering how the heck you will be able to stay on top of all your results and see exactly where you are above or below target.

Well, lucky you. We have the tool that does just that.

ROAS monster was designed with the purpose to evaluate all your ad results according to your targets. This helps you stay on top of your ad game, saves you money by marking unprofitable campaigns and notifies you of ads that are doing good and should be scaled.

Oh and the best thing about it?

You can use it for free for 30 days.

Hurry, set your ROAS or CPO, book a DEMO call and be on your way to your FREE TRIAL.

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