Why are target ROAS and CPO crucial for performance-based ecommerce advertising?

You might think analytics is a snoozefest, but think about this: How do you know whether your ads are doing good or not?

Scrolling through various ad metrics is simply not enough if you don’t know exactly when you break even and make a profit.

Cost per order of $8 looks pretty good to me.”

Is relying on your feeling really the way to go? This was a rhetorical question.

If you want to focus on performance in e-commerce, the first thing you need are clearly set goals, right?

Goals help you determine what’s good and what’s bad, which is crucial, if you sell multiple products on multiple markets. Ideally, you would set a target ROAS or CPO for each product. That means you should know your minimal ROAS and your maximum CPO at which you are still making a profit.

Now, let’s go back to basics.

What is ROAS?

ROAS

ROAS or return-on-ad-spend tells you how much return you get from the money you spend on online ads. The higher the ROAS, the better.

Knowing your target ROAS helps you evaluate the performance of ad campaigns and how they contribute to your online store’s bottom line. It also allows you to quickly see which results are over or under the line, which speeds up optimization significantly (shutting off ads, scaling budgets, etc.) and helps you understand where you make most of your profits.

What is CPO?

CPO

CPO or cost-per-order tells you how much of your ad budget is OK to spend per order. The lower the CPO, the better.

By setting a target CPO, you know exactly which ads or campaigns are profitable and which are not. It also means you can scale those with CPO under your target and generate more orders that will still be profitable. Quantity is where you will make most of your profits, so don’t be shy to scale campaigns that are doing good.

As mentioned above, having a breakeven point to know whether you are making a profit at all times is crucial.

Knowing when your campaigns are profitable means you can raise budgets confidently - when CPO is low or ROAS is high.

Let’s put that into numbers so you’ll see what we’re going on about.

Scenario 1:
Your target CPO is $10, and you currently have a campaign with a CPO of $5 that generated 100 orders per day on average. By being $5 below your target CPO, you have $500 of wiggle room per day in your ad budget. Not bad at all.

Scenario 2:
You lift your budgets and as a consequence, your CPO jumps up to $7 (which is still below target) and your orders now bump up from 100 to 500 per day. By being $3 below your target CPO, you now save $1500 of your ad budget per day.

Quite a difference, isn’t it?

The lesson here is that by knowing your targets, you know exactly how much you are spending, saving and making as well as where you can scale - which is one of the most important things in e-commerce. Most businesses make the majority of their profits by selling large quantities, which requires scaling. If you scale without being absolutely positive that your numbers are green, you might end up making a loss.

If you found all this analytic talk a bit overwhelming, you’re not alone. It can be hard to stay on top of all your results. If you need help with that, you should try out ROAS monster, a tool that arranges all your results according to the targets that you set, so you have a full overview of where you are under or above the line. Trust us, it’s life-changing. Oh, and there are over 15 other spectacular features, created specifically for boosting your performance.

Curious?

See ROAS monster in action and book a demo call.