Return on ad spend in retail media: A guide for retailers and advertisers
Return on ad spend, or ROAS, is an essential metric for measuring the effectiveness of advertising campaigns, helping businesses understand how much revenue is generated for each dollar spent on advertising.
With the growing importance of retail media ad spend in eCommerce, measuring performance has become crucial for retailers. Retail media networks — where these ad dollars are spent — are growing across digital marketplaces, and so are the complexities of ad performance measurement.
This guide digs into the nuts and bolts of return on ad spend, including how to calculate ROAS and, most importantly, how retailers and advertisers can leverage it to achieve success in the evolving retail media landscape.
What is ROAS and why does it matter in retail media?
ROAS, or return on ad spend, is a key metric that evaluates the revenue generated per dollar spent on advertising. Distinct from ROI, which measures overall profitability, ROAS focuses specifically on the performance of advertising campaigns.
In retail media, ROAS is focused on the returns a brand generates from advertising their products, for example within search results on an eCommerce website. In this regard, a higher ROAS translates to more effective and profitable digital campaigns.
For advertisers running retail media strategies, ROAS provides value in the form of immediate feedback on campaign performance, ensuring advertising efforts translate into visible sales within the networks that these campaigns are run.
Why is ROAS crucial in retail media?
For both retailers and advertisers, ROAS serves as a compass to refine strategies, optimize budgets and outperform competitors.
For Retailers: High ROAS demonstrates the effectiveness of their retail media network’s ad opportunities, ensuring vendors see value and continue investing.
For eCommerce Vendors: ROAS helps fine-tune ad strategies, ensuring ad spend drives maximum sales and profitability.
Understanding ROAS formula and calculation
The fundamental formula for calculating ROAS is simple yet powerful:
ROAS = revenue attributable to ads ÷ cost of ads
For example, if you spent $5,000 on a campaign and generated $25,000 in revenue from it, your ROAS would be 5:1, or 500%.
How cost of ads is calculated in retail media
To properly calculate ROAS you also need to know the cost of your ads, and in retail media there are three distinct pricing models that govern this cost.
Cost-per-click (CPC): CPC is the amount an advertiser pays each time someone clicks on their advertisement within a retailer's online platform. CPC is typically used for sponsored products.
Cost-per-mille (CPM): Mille is latin for a thousand, so therefore CPM is the price an advertiser pays for every 1,000 impressions of their advertisement. CPM is usually used in display and video campaigns.
Reserved deals: A model where an advertiser secures exclusive placement and visibility — a.k.a. 100% share of voice — for their ads across the retailer's platform for a specific period of time, ensuring their brand is the only one seen in designated ad spaces.
ROAS in different formats
Return on ad spend is typically expressed in one of two formats:
Ratio: ROAS expressed as a ratio (e.g., 5:1) means for every $1 spent, $5 in sales is generated.
Numeral: ROAS can be expressed as a plain number, i.e. “5.”
Percentage: Expressed as 500%, illustrating the campaign's efficiency.
Advertising cost of sales
Another way to look at ad performance is through ACOS, calculated as follows:
ACOS = (cost of ads ÷ revenue attributable to ads) × 100
Essentially, ACOS is the inverse of ROAS. For example, if your ROAS is 5:1, your ACOS would be 20%. This perspective highlights the percentage of revenue spent on advertising, helping businesses establish profit margins. As sellers typically know their margins, they can easily ascertain their margins after advertising by subtracting ACOS from said margin.
In that regard, when it comes to ACOS, lower is better.
Key factors influencing return on ad spend in retail media
Several variables can impact your ROAS in retail media, but here’s what you should monitor:
Product appeal
Products with strong customer demand or unique value propositions naturally achieve higher ROAS due to factors such as brand awareness and optimized product detail pages.
Brand Awareness: Established brands typically enjoy higher customer trust, leading to better ad performance and increased ROAS.
Optimized Product Detail Pages: High-quality images, compelling descriptions and accurate metadata can significantly boost conversion rates and contribute to a higher ROAS.
Ad relevance and quality
To achieve a high ROAS, advertisers should focus on targeting precision and using high-quality, relevant ads — and creative where applicable.
Keyword Targeting: Using relevant keywords ensures that your ads are shown to the right audience. Automation tools — like those provided by Mirakl Ads — can help further improve targeting precision.
High-quality creative: When leveraging display ads, for example, it’s critical that advertisers leverage appealing creative and catchy taglines that will stop and engage their audience.
Personalized Advertising: Utilize platforms equipped with advanced algorithms to tailor ads to individual customer behavior, improving both engagement and conversions.
Bidding strategies
Implementing smart bidding strategies and understanding the factors that influence them are crucial to optimizing your ROAS.
CPC/CPM: While CPC/CPM and ROAS are inversely related, the goal isn't simply to aim for the lowest possible CPC/CPM. Higher CPC/CPMs can secure better ad placements and increase visibility, potentially driving more conversions. Due to factors like floor prices and their relationship with CPC/CPM, visibility and conversions, optimizing costs here requires expertise in traffic management or automated campaign optimization tools.
Market Size & Competition: Larger markets offer growth potential but also increased competition, which directly impacts CPC/CPM and ROAS. Strategic bidding is essential to optimize ad placement and minimize CPC/CPM while maximizing visibility to the right audience in competitive markets.
What is a "good" return on ad spend benchmark?
The concept of an ideal ROAS is highly variable and depends on several key factors such as industry, business model, campaign objectives and product pricing. For instance:
High-value items, such as those priced at $1,000, often achieve ROAS values of 10 or higher with greater ease.
In contrast, products priced around $10 usually yield more modest ROAS figures due to narrower profit margins.
Therefore, aligning ROAS with product prices is essential for setting realistic benchmarks.
A common benchmark is a 4:1 ROAS, which means generating $4 in revenue for every $1 spent. However, it's important to emphasize that this is merely a general guideline and what constitutes “good” will vary from business to business.
Understanding break-even ROAS
Break-even ROAS is the threshold where revenue matches ad spend, effectively covering costs without generating profit. This metric is crucial for advertisers, as surpassing it is essential for achieving sustainable growth.
ROAS vs. other advertising metrics
Comparing ROAS with other key performance indicators adds depth to campaign analysis and provides a deeper understanding of performance:
ROAS vs. ROI: While ROAS evaluates ad-specific performance, ROI examines overall profitability, including factors like production costs and operational expenses.
ROAS vs. ACOS: ROAS focuses on potential earnings, whereas ACOS reflects the ad spend's share of the total revenue.
ROAS vs. CTR: Click-through rate measures ad engagement via clicks, while ROAS assesses campaign profitability based on revenue.
ROAS is not incrementality
ROAS doesn't account for the incremental impact of advertising. It measures the overall revenue generated by a campaign but doesn't isolate the additional revenue that can be attributed solely to the advertising effort. This can be particularly problematic when evaluating campaigns that run alongside other marketing activities or during periods of high organic demand.
It’s also important to note that ROAS can be influenced by external factors that are beyond the control of advertisers, such as seasonality, economic conditions and competitor activity.
Driving profitable growth with retail media
Achieving profitable growth in retail media hinges on strategic use of ROAS. To maximize this potential, businesses should:
Adopt data-driven strategies: Regularly analyze performance data to make informed adjustments based on actionable insights.
Leverage automation: Utilize tools like Mirakl Ads to automate ad optimization, enhance targeting and minimize inefficiencies.
Optimize product listings: Enhance product pages with rich content and clear details to improve conversion rates.
Benchmark and compare: Continuously monitor industry-wide ROAS benchmarks to accurately assess your campaign's performance.
ROAS is more than just a metric: It's a strategic guide for navigating retail media. By prioritizing smart targeting, ad relevance and competitive bidding, and by continually refining your approach, you can unlock the full potential of retail media networks.
To learn more about unlocking ecommerce growth with retail media, download our eBook.
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