Your store isn’t making money, and you have no idea why. You look at Return On Ad Spend (ROAS), wondering, “how can I raise that number??” You can’t sleep. You barely eat. You haven’t seen your friends in months and they start wondering if you’ve been the victim of your tiger-loving wife’s murderous plans…Wait, wrong story. But it’s not fun! We’ve been in that position, and we want to help you know what’s going on and how to fix it.
All too often, digital advertising can seem like a bear. A bear that either brings you gifts in the form of riches and prosperity or rips you to shreds with its merciless claws and fangs.
But here’s the truth: digital marketing is just a machine. Yes, it has moving parts, but not an overwhelming number of them. Just like a seasoned mechanic can look at an engine, figure out what’s going wrong, and get you back on the road, this guide will walk you through exactly how to analyze your ecom advertising results, diagnose the problem(s), and give you ideas on how to fix that sucker in no time.
The MOAM: ROAS
Let’s get this party started off right with the Mother Of All Metrics (MOAM): Return On Ad Spend (ROAS). ROAS represents the heart of your advertising. It answers the existential quandary, pondered through the ages, “is my advertising profitable?” To find out if your ROAS is good or bad, you’ll need to know your Breakeven ROAS.
If that requirement just caused your anxiety levels to spike, don’t worry! Lucky for you, figuring this one out requires exactly zero vows of silence or years of solitude. Just use this formula:
Return On Ad Spend = Average Order Value (AOV) / Cost per Acquisition (CPA)
In other words, how much money is returned to you every time you toss a dollar out into the advertising world?
When ROAS changes, you will want to ask, as marketers do, “But WHY?” Well, let’s dig in.
Since ROAS is made up of two metrics, AOV and CPA, the key must lie in one, the other, or both. Does one look significantly different than it did during a previous time? The secret to why ROAS changed is hidden in AOV and CPA.
Once you identify whether the change is due to AOV, CPA, or both, you’re good, right? Au contraire, mon ami. But at least you know where you’re going now. Let’s suppose the issue lies with your AOV.
The AOV Lane: Average Order Value
Average Order Value (AOV) is a powerful lever you can pull to increase profits without increasing ad spend. It’s made up of two metrics: Average Price per Item and Average Quantity per Order, like this:
AOV = Avg Price * Avg Quantity
When you have a change in AOV, you’ll see a difference in either average quantity or average price from a previous period (or both).
If you think low AOV might be an issue, here are a few tips:
Tips for increasing AOV:
1. Offer upsells: people are usually willing to buy more if you just ask! Whether it’s a high or low ticket item, it never hurts to ask…
2. Offer bundles: bundles increase perceived value. Try to include things that bring high value to a customer but cost you little; for example, an information product.
3. Offer quantity discounts: more buying = more savings. This tactic incentivizes more purchases by creating a higher perceived value when customers buy more.
4. Increase price: this can be scary but just might work! You could be underselling your product, and increasing your price will tell you quickly whether that’s the case. Worst case, you return your price to its original level – best case, higher AOV!
Rrrrch! Now let’s look at the opposite scenario and pretend the problem was not the amount of product your customers were buying, but how much you have to pay to get them to buy. Let’s chat CPA.
Your Friendly Neighborhood CPA
If you look over your Average Order Value (AOV) and Cost per Acquisition (CPA) and determine that CPA is the issue (it’s costing you too much to get people to buy), DO NOT LOSE HOPE. We’re gonna breathe, relax, and do some sweet, sweet analysis.
CPA consists of two things: Cost per Click (CPC) and Website Conversion Rate (WCR). To get CPA, just divide your CPC by your WCR:
CPA = CPC / WCR
In essence, CPC tells you how much it’s costing you to get someone onto your site, and conversion rate tells you how likely it is that someone who lands on your site will convert.
So, if your CPA is higher than you’d like, is it due to CPC, WCR, or both? Benchmarks can vary widely, but as a general rule, a CPC under $1 would be considered good, as would a WCR of 2%-3%+.
At this point, we’re almost to the root of the problem. Here’s what we know:
1. ROAS changed
2. What caused that change (AOV, CPA, or both)
3. How to affect AOV
4. How to find out what’s causing a change in CPA
Now, let’s go one level deeper and assume that a change in CPC is driving your less-than-favorable CPA. What should you do about that?
The All-Powerful CPC
Cost per Click consists of two metrics (if you’re surprised by now, it’s your own fault): Cost per Mille (CPM) and Click-Thru Rate (CTR). The formula is a little trickier than we’ve seen so far, but not bad:
CPC = CPM / (CTR*1000)
CPM measures how much it costs to get your ad shown 1000 times and CTR is how many times out of 100 impressions someone clicks on your ad. Since CTR is a percentage, we multiply by 1000 to get clicks per thousand impressions, then divide into CPM and boom baby! CPC. Sorry for the math.
So, how do you affect CPM? And what about CTR?
Great questions. CPM is generally determined by an auction, where the advertising platform pits your ad and budget against other ads vying for the same eyeballs, then picks a winner. It’s not about JUST budget, though, because the advertising platform wants to keep its users happy. So if you have a great ad that is likely to make someone happy and convert, you can win with a lower budget! Moral of the story: make helpful, engaging ads. The more helpful and engaging your ads, the lower your CPMs will likely be.
Incidentally, this is also how you increase CTR: make ads people want to click! Make sure your creative is eye-catching and your copy hooks your audience by focusing on their problem. Then include how you’re going to solve it for them.
Finally, another way to get lower CPMs is to go after less competitive audiences. If you can think of a creative way to target an audience that may be a “road less traveled” compared to other advertisers, you’re likely to win auctions for less!
Alright. So let’s suppose your CPC is doing great. In that case, we move right along to Website Conversion Rate (WCR).
The Whole Enchilada: WCR
There are entire books written about creating websites that convert. Here, we’ll look at one way of analyzing the website conversion rate funnel using the two metrics I’ve found to be most relevant and actionable: Add to Cart Rate (ATC%) and Abandoned Cart Rate (ACR). Once someone lands on your site, their likelihood of converting is made up of two things:
1. How likely they are to add something to their cart, and
2. How likely they are to NOT abandon that cart and peace out.
WCR is calculated like this:
WCR = ATC% * (1 – ACR)
If you find out that your WCR is not where you’d like it to be, check your ATC%. To do that, divide the number of ATCs in a given time period by the number of site visitors:
ATC% = ATCs / Site Visitors
Benchmark ATC% is around 9%-10%. If you’re above this, you’re doing well! If you’re below this, try to see how you can get more people to add to their cart. Here are some ideas:
How to increase your Add to Cart Rate:
1. Have clean, professional product photos (including lifestyle photos)
2. In your product description, emphasize the solution your product will provide and not just its features
3. People tend to leave a site when it takes longer than a few seconds to load, so keep a close eye on your site speed
If your ATC% looks good, check out your ACR. To get to your ACR, take the number of people who added to their cart but DIDN’T purchase, and divide that by the total number of ATCs, like this:
ACR = (ATCs – Purchases) / ATCs, or simplify to
ACR = 1 – (Purchases / ATCs)
Anything below 70% ACR is pretty stellar. Above 80% could use some work. But for you individually, the number that qualifies as “good” depends on what makes your WCR high enough to keep your store profitable.
Here are some ways to decrease your abandoned cart rate:
1. Offer a discount code in return for an email address in a popup on your site
2. Offer a discount or special deal in an abandoned cart recovery email
3. Use advertising platforms to retarget people who add to their cart but don’t buy
4. Scream at the mirror until you feel better (won’t decrease your ACR, but might help emotionally)
Conclusion
Ecommerce advertising can seem like a nasty, untamed jungle where Mark Zuckerberg makes the rules and the god of PPC doles out eternal punishments and glorious rewards at random – but it’s not. It’s a machine, there’s a method, and you can master it. Using this blueprint, you’ll be able to analyze, diagnose, and treat your e-commerce business with proficiency and accuracy.
And, we get it – you’re busy. You have a business to run. That’s why we’re here. At Scroll, we use data, analytics, and creativity to make sure our clients see the return they want. If that sounds like what you need, shoot us a message at info@joinscroll.com We’d love to chat.
Here’s to higher ROAS!
