If you’re a shrewd eCommerce seller you know that making every dollar count is important — and that applies double to your marketing budget. As the price to attract and acquire customers through advertising continues to climb, it’s more important than ever to use every trick in the book to improve your return on ad spend (ROAS).
Did you know that one way you can actually improve your ROAS is through supply chain planning? Read on to learn why ROAS is a vital metric for all eCommerce sellers to monitor, and how to improve it through strategic supply chain planning.
Why you need to evaluate your ad performance
First, let’s start with the obvious: as an eCommerce seller, and particularly a seller on Amazon, you are probably running sponsored ads. These ads help you increase sales, improve your product discoverability, and grow your organic rankings for your product listings.
And these ads aren’t like crockpots — you can’t just take a “set it and forget it” approach. Evaluating your ad performance is just as important as actually running the ads — otherwise, you’re just throwing money at Amazon and hoping it works.
There are many ways to measure and evaluate the overall success of your ads.
You can look at TACOS, or the Total Advertising Cost of Sale, to learn how much revenue your ads are actually making you. You could also look at any number of the other acronyms: CPC (cost-per-click), CTR (Click-through rate), CR (conversion rate), and even ACoS (advertising cost of sales).
All of these metrics help sellers evaluate the overall performance of their ads, but they’re each only one piece of the puzzle.
For successful online sellers, one metric stands above the others and helps you quickly decide if your ad strategy is working. That’s ROAS, or the total amount you spend on ads divided by the total revenue earned by those ads multiplied by 100. Or, in layman’s terms, the revenue amount that is earned for every dollar spent on advertising.
When your ads are reaching the right audience, hitting on the right messages, and accurately reflecting the price and quality of your product listing, it should show in your ROAS. While this metric still should not be the only one you monitor as a seller, it can be a great indicator of the health of your ads strategy.
And as your business grows, so should your ROAS — improving your ROAS over time shows that you are getting better and more strategic with your ads and you are capturing more customers for less money.
Why is ROAS important?
Historically, Amazon was not always the top place to run product ads. For years, Google was king, and marketers and SMBs alike vied for top ad placements on Google to drive traffic to their eCommerce stores. However, even before the global pandemic shifted the eCommerce world in fundamental ways, Amazon ads were overtaking both Google and paid social ads in the speed of growth.
It’s currently estimated that for Amazon sellers, about 90% of their total advertising spend goes to Amazon. That’s no small amount of money, especially for solopreneurs and small businesses.
You wouldn’t spend 90% of your budget on a product you didn’t believe in, and you shouldn’t spend 90% of your budget on ads unless you know you know those ads are working, and you know you have the inventory strategy to stay stocked.
Of course, there are many types of ads under the Amazon ad umbrella, but these four consistently drive the highest ROAS for sellers. Sponsored products, sponsored brands, sponsored displays, and Amazon DSP are all great options for sellers that want the most return on their investment. These are the ads that sellers focus on when they want to see the highest ROAS.
ROAS varies from product to industry, so it’s important to note that a good ROAS for one seller may be a poor one for another, and vice versa. For a seller who sells, say, deodorant or chapstick, a good ROAS may be lower, as it will cost more to acquire a repeat customer over a single-purchase customer. Other factors that influence ROAS could be the industry or the overall product lifecycle.
An average and achievable “good” ROAS across industries and products is generally 3 – 5 but can be higher or lower depending on all of these factors. When considering a “good” ROAS, you want a number that is high compared to similar products and similar sellers.
What happens when ROAS is too high?
Targeting a high ROAS on its own is vital, but there is a unique problem that sellers can face when they are making progress with their ads and achieving a good ROAS. The problem is that their ads are too good, and they sell more of their product than they expect.
For many sellers, running ads for their product — and especially for a new product — is crucial in making sure they sell all their inventory. However, especially when a product is new and untested, sellers can’t predict how well their ads will perform or how well their product will sell.
What often happens is a yo-yo — their ads perform well and drive conversions and purchases, but as the ads continue to direct qualified buyers to the product page, the sellers may find that they’re running out of inventory faster than anticipated.
Which, of course, leads to the dreaded stockout. And a stockout can hurt a seller in a multitude of ways beyond just not being able to sell a product temporarily. A stockout halts revenue in its tracks causes an inconsistent and negative customer experience and permanently damages that product’s place in the organic search results.
A stockout that confuses an already difficult-to-navigate Amazon algorithm.
Overall, a stockout can turn what sounded like a good problem (having great ads), into a very real problem that can damage an Amazon store — permanently.
Traditional stockout strategies — and why they don’t work
Traditionally, when sellers find that their ads are performing too well and they’re approaching a stockout, they follow a similar pattern.
First, they notice their product jumps in popularity and is climbing in the search results. Then, when inventory starts getting low, sellers may want to pause ads entirely or slow them down aggressively.
This strategy is common, but it’s not a good one because it confuses the Amazon algorithm, and can mean that when the product does come back in stock, it’s even harder to get it to show up in search results.
Another strategy that sellers take is to increase the price of their product in an effort to slow down sales and make a little extra profit if they know they’re going to stick out anyway. This strategy can work for small sellers and brands that are more focused on quick profits, but it’s not a sustainable approach.
Consumers expect products to stay the same price, regardless of the seller’s inventory, so if they notice that a seller is raising prices, they may react negatively. This can have a negative impact on a seller’s overall brand and customer experience. Plus, it can also confuse the algorithm when you have inventory again and lower the price.
Another approach sellers may take is to simply try to carry more inventory. But this poses several unique issues. For a new product, there is no guarantee that the inventory will sell, and the seller stands to lose more money in the unsold products. This also ties up more cash flow in the inventory and leaves less money for ordering new products, advertising, and freight and logistics costs.
Simply stocking up does not prevent a stockout; it just puts more pressure on the seller and a greater pinch on cash.
And, of course, all of these common approaches only delay the inevitable: stockouts. In addition to all the negative impacts stockouts have on a product’s search ranking, the Amazon algorithm, and customer experience, if a seller doesn’t know how to prevent this cycle from continuing they will always experience stockouts and uneven sales.
That means inconsistent revenue for sellers and confusion for customers — two things every successful seller wants to avoid. This cycle also traps sellers in a reactive business strategy that makes growth and scaling incredibly difficult.
How supply chain planning can improve ROAS
Supply chain planning can have a huge positive impact on a seller’s ROAS, and builds ROAS in a sustainable way. How is that possible?
First, sellers need to get into the mindset that their ROAS can be much higher than they think it can be with careful planning. In fact, in 2021 the majority of 3rd party sellers on Amazon reported a ROAS of 7-10.
At 8fig, we were curious about if our top sellers had any commonalities or any metrics of success across the board. After chatting with a focus group of these sellers, many mentioned that an unexpected result of their partnership with 8fig had been an increase in their ROAS. Sure enough, in our investigation, we found that among our 285 top sellers, most saw a sustained increase in ROAS after working with 8fig.
8fig’s sellers span industries, products, and product life cycles, so we found that the average ROAS varies greatly between sellers. 8fig also starts by funding a seller’s hero products and then expanding into other products with a proven track record of sales, so the average ROAS in our sellers is also slightly higher than the average seller because we are analyzing their best-selling products.
So, why are these sellers seeing an improved ROAS over time? One commonly cited reason was the supply chain-first funding model they use. Instead of providing a lump sum of capital for sellers to individually parse out over months while paying remittances from day one, these sellers get funding for individual batches of product and plan out batches for 6 months and beyond.
The result is less reactive inventory and a constant plan to restock. This helps sellers stay consistent with their inventory and stay stocked through even the best ad campaigns. That means a higher ROAS over time and fewer stockouts.
Think about it — if you have a great ad campaign running and your inventory is getting low, what do you do? You probably try to order another batch of products. But if you’re ordering a product when you’re already running low on inventory, you’re unlikely to get that new product in time to avoid that stockout. Especially in a world where supply chain issues and freight delays are the rules, not the exception.
Because these sellers stack their inventory orders strategically, they don’t need to worry about ordering another batch of product — an order has already been made and is in the works.
And it’s already funded, so sellers don’t need to worry about any funds they have tied up in ad spending, inventory, or anything else. That means that not only are these sellers improving their ROAS and avoiding stockouts, they’re actually opening up opportunities for store growth as well.
Of course, a well-managed supply chain is only one of the factors that go into improving your ROAS, and ROAS is only one piece of the puzzle when it comes to advertising. But right now, many Amazon sellers think that their ROAS needs to have a limit in order to avoid stocking out, and that just isn’t true.
On a platform where advertising is becoming more and more expensive, sellers need to explore every option to not only get the most out of their advertising dollars but also put safeguards in place to avoid stockouts when their ads do perform well. Investing in a more robust supply chain planning strategy is a great way for sellers to improve their ROAS over time.
Additional Offer
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