Before spending money on ads, it is extremely important to know your numbers. How much can you pay per purchase?
To make sure the ads are actually profitable, use this formula to calculate your profit margin and max CPP (cost per purchase):
Sale price - tax - payment processing - product cost - inbound freight - pick and pack costs (3PL) - shipping to customers - desired profit margin = Max cost per purchase (CPP)
A good ROAS depends on several factors, including your advertising goals. If brand awareness is your goal, ROAS will be low, since awareness does not typically drive immediate conversions.
A good ROAS also varies across industries. Some industries require a higher ROAS for the advertising spend to be considered worthwhile. For example, a higher ROAS may be expected with companies that have a low customer lifetime value (CLV). More revenue up front makes up for the fact that less revenue is generated over the customer’s lifetime.
A common benchmark for ROAS calculations is 4:1. This means that for every $1 you spend, you generate $4 in revenue. The appropriate ROAS benchmark varies across industries. Before you launch an ad campaign, determine a target ROAS that is suitable to your business and industry.