IS PPC ROAS>1 REALLY MEAN PROFITABILITY?
LET’S GET CONFUSED
Say our product has:
1. Selling price = $20
2. Profit Margin = $5
3. Break-even ACOS = 25%
Assume, that one particular keyword has a CPC of $1. And after getting 5 clicks, we get a sale. It means $5 is spent to bring the sale of $20. And ROAS is 4. Congratulations, we are 4 times profitable.
Our profit margin was $5 and we utilized all that margin ($5) in the clicks to get that sale. So how can we say that we are profitable?
Because the other $15 are spent on the Landing Cost & Amazon Fee of the product and they are not contributing to our profitability. Making sense?
Now let’s come to the point I want to discuss. ROAS formula has a serious defect. It’s calculated as:
ROAS = Sales/Spend
The “Sales” factor in the numerator accounts for the REVENUE of the product (Including Profit + Landing Cost + Amazon Fee) and NOT the PROFIT. It essentially means that with the current definition of ROAS, we can’t say that we are profitable even if ROAS>1 because Landing Cost has already been spent on the product. And when we get a sale, Amazon Fee will be deducted leaving us with a Profit Margin only.
And in the light of the above example, if we have spent $5 on PPC, we are selling the product with no profit/no loss even though ROAS = 4.
So, according to me, if the “SALES” factor in the numerator of ROAS formula accounts for Profit Margin only instead of Revenue of the product, only then ROAS>1 means profitability. Otherwise, for this particular example, we are not profitable even if ROAS = 3.5. Because Ad Spend has become $5.71 ($0.71 above our profit margin).
In other words, ROAS=4 means Break-even ROAS. We will be profitable only above ROAS=4 if we use Revenue instead of Profit Margin in the ROAS Formula.
What Do you think? Please let me know. Maybe I’m missing something.