Watch the video, or read the Blog Post below.
You’re getting your ROAS calculations totally wrong! Did you know that there is one more factor that you’re not taking into account?
Yup, you’ve read that right; and if you keep on ignoring this specific factor, there is a good chance that you are losing a LOT of money, especially when you are only relying on your ROAS to breakeven.
I have personally made this mistake, and it is indeed a good thing that I noticed what I was doing wrong before I can even push my businesses to greater heights. Now, you know me; through my experiences as a dropshipper, I love making an example out of myself by experimenting on different things and trying out new tactics and strategies in hopes of creating the perfect, profitable dropshipping store that you yourself can test out and make your own. I don’t want to make you suffer any significant losses because of me and what I have previously showed you; today, we are going to correct that!
In this post, I am going to show you exactly what you are missing and finally do your ROAS calculations the right way. This is the one thing that you should do when you’re running Facebook ads to your sales funnel and eCommerce websites.
Be informed that we are going to the following technical terms in this post a great number of times. To avoid any further confusion, it is best for you to learn more about them before we proceed.
Your COG (short for cost of goods) is the amount that you are going to pay your supplier to purchase one unit of a particular product.
The selling price is what you would actually put on the price tag for customers to see on your website.
Your net profit is the total amount that you will make out of your sale, minus your cost of goods. The net profit can also be considered as the maximum amount spendable on your ads. Take note that in the calculation of the net profit, we are not going to include any other external factors.
Your margin (%) is the ratio of your profit to revenue. This implies that you can only use this specific percentage of your total revenue on your ads.
The BE ROAS (short for breakeven return on ad spend) is a factor that you really need to be aware of. It is an integer that determines how much you need to be able to make in order to make up for the loss caused by the cost of goods.
So let’s say that you found a winning product for $5 and want to sell it for $30. Your net profit would then be $25 (30-5), and your BE ROAS will be calculated as follows:
BE ROAS = (selling price) / (net profit)
And your BE ROAS for this example would be 1.20, which means you would need to sell an approximate of 1.20 units to be able to breakeven.
ROAS Calculation — The Right Way
Ordinarily, we would go with the above calculations for our ROAS. But of course by now you should know that there is still a missing element in the equation, and it is not something that one can easily ignore.
So now let’s get down to business — and I’ll be straightforward with you. The secret to calculating your ROAS the right way is to include Stripe and PayPal processing fees into your losses. Why? Because you don’t want to have to scale up your Facebook ads to a lot of ad spend and then eventually realize that you are not as profitable as you initially thought. Moreover, there may be cases where your customers would want a refund; of course, as a reputable business, you need to oblige to their requests (conditions applied), and if you are sending money via these payment gateway systems, it is undoubtable that they will charge you transaction fees.
In this post, we are going to focus solely on Stripe because I prefer to use it on my own businesses than PayPal.
What is Stripe?
Millions of companies of all sizes—from startups to Fortune 500s—use Stripe’s software and APIs to accept payments, send payouts, and manage their businesses online.
Stripe is an underrated alternative to PayPal, only in my opinion, it does the job a lot better. The payment processing platform focuses its services more on online stores and eCommerce websites, thus making it a better option.
Stripe Processing Fees
Here you can see that Stripe’s processing fees fall under two categories: domestic and international card transactions.
Domestic cards: 1.75% of total amount + A$0.30 per transaction
International cards: 2.90% of total amount + A$0.30 per transaction
If you are running an eCommerce store, you should expect that you will not only have local transactions; in fact, there might even be more international ones. That is why in our revision of our ROAS calculation, we will be using the international transaction fees.
Plus, if we expect the worse case scenario and end up not encountering it, I can feel better knowing that my numbers are more accurate as compared to wanting to simply make the numbers on my spreadsheet look presentable and pleasing to the eye. We can also get that extra money and put it straight into our back pocket, for us to keep!
So let’s get down with the revision right away.
ROAS 2.0: Calculations
On our ROAS calculation spreadsheet above, we are going to add a new column for the Stripe fees. Data will then be calculated as follows:
Stripe fee = (selling price) + (selling price x 2.9%) + 0.30
Then, change your net profit calculation; include the Stripe fee to your subtrahend. You should then expect your net profit to be decreased, and your BE ROAS to be slightly higher. And this is what I was talking about when I said that you are doing your ROAS calculations wrong: there is a significant factor in the determination of your profitability!
You might think that this is a measly percentage, and it probably won’t affect your overall profit at all, considering how small it is. But once you start thinking big and scaling up, you will eventually realize that every penny does count!
Still don’t believe me? Just look at these numbers. Notice that as your cost of goods and selling price increase, so does your actual BE ROAS.
Let’s Wrap It Up!
PayPal and Stripe processing fees ARE a huge deal, and they are fees that you should never take lightly. These small charges will eventually build up into an impactful loss if you do not pay enough attention to is. So, why wait? Review and revise those calculations now before it’s too late.
If you have any more questions about Stripe and its processing fees, calculating your BE ROAS the right way, finding and selling winning products, creating the most profitable dropshipping stores, dropshipping in Australia or anything regarding this video, feel free to personally contact me via the Contact Form HERE. You can also leave your comments and feedback below, and our team over at WagePirate will definitely get back to you with a response. For more reviews, news and updates, do not forget to subscribe to my YouTube channel!