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  • Writer's pictureArushi Thapar

D2C 101: What's up with your ROAS?


Too often, we hear D2C brands ask this question either to their teams, consultants or themselves - ‘What’s up with my ROAS?’ & this seemingly uncontrollable number with a high dependency on performance marketing gives most founders sleepless nights. 


Let’s break it down then?


First, let’s understand the term ROAS or Return on Advertising Spends. Simply put, it is the revenue generated as compared to every Rupee (or dollar or euro) spent on advertising. 


ROAS = (Revenue Generated by Advertising) / (Cost of Advertising) 


For example, if you spend Rs. 1000 on advertising and generate a revenue of Rs. 3000, the ROAS becomes 3. It’s obvious now (right?) that the ROAS needs to be as high as possible for a business to continue to scale fast, and sustainably. 


So is this fairly simple-looking ratio really that simple to optimize?


Well, that depends! There are a host of things that affect your ROAS, and you need to diagnose the issue and constantly up your game across each of these areas. We have a framework that’ll help you problem-solve and figure out how to improve your ROAS. Let’s dive straight into it.


Here are some things that may be affecting your ROAS


Simplistically, they fall under two heads: what happens outside the platform(or outside your website) and what happens on it.

1. Paid Media Advertising: The #1 thing that impacts your Return on Ad Spends is, duh, your advertising.


Let’s take the example of Meta advertising. 

You have some initial advertising budget in mind. The advertising spend, depends on the cost needed to reach a sizable chunk of your target audience (measured by CPM) - this varies with the size of the target audience, time of day, number of competitors advertising at the same time, etc.


Once audiences see the ad, they may want to click on it and reach your website (measured by CTR). This again depends very much on the type of creatives and if the communication is relevant to the audience. One important aspect most brands miss, is that people are more likely to engage with brands they trust and therefore building top of mind awareness and trust are key to generate clicks and conversions. More on that in another blog that we’re yet to write :P


2A. Website Journey: Once audiences click on ads and land on your website, you need to make the journey smooooth enough for them to shell out their hard earned money on. Here’s when the right kind of landing page designs that are quick to load, communicate the value proposition clearly and have clear call-to-actions really help improve the Conversion Rate.


2B. Average Order Value: Most D2C brands underestimate the power of this metric on their brand’s overall revenue performance. Assume that you spent INR 500 on advertising and getting a customer who spends INR 500 on your website, you get a ROAS of 1. If you consistently try to increase the AOV even by a small % (say, each quarter), using various up-selling and cross-selling techniques, you see a compounding effect on the ROAS. And who doesn’t love a greener bottomline, no?


There’s probably a hundred things that impact ROAS, but make sure you measure these top metrics effectively and consistently to see areas of improvements and optimize as you go. Generate hypotheses, pick one, record learnings, measure and move to the next one. 

If you have a similar problem you are stuck with or need help understanding your D2C data better, reach out to us at meet@thebuildinc.com. We typically get back really quickly and love sharing gyaan. Talk soon, then?


Decoding the D2C jargon

CPM - Cost per mille or Cost per thousand impressions. This can be calculated as the advertising spend per 1000 impressions (number of times your ad appears on the particular platform).

CTR - Click Through Rate. This can be calculated as the Number of Clicks / Impressions, and is typically represented as a percentage.

Conversion Rate - It is the ratio of orders placed to the number of sessions that a platform receives: Number of Orders / Sessions, and is typically represented as a percentage. 

Average Order Value - It is calculated as the Revenue generated / Number of orders and shows the average amount that customers typically spend on an order


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