Discover all the nuances of ROS and how to improve it

A golden rule exists for any business or company: it must be efficient. Higher efficiency means more chances to survive in our competitive business environment. However, saying, “We are efficient!” is not enough. Certain metrics exist to measure and demonstrate it. Return on sales, unlike other common ratios, like profit on ad spend or return on investment, is aimed at showing how successful your company is in converting sales into actual profits. It will help you to understand how healthy your company and all its business operations are. Obviously, a logical question arises when it comes to health and everything related: how can we improve it? Well, you are in the right place to find out!

What is return on sales?

ROS is the ratio that shows what part of the company's revenue turns into pure profit. If ROI or ROAS are primarily focused on investments or specific ad campaigns, return on sales is the metric that provides a deeper insight into how profitable the business is. The ROS formula is simple and does not require you to have a pHD in math to calculate it.

After completing the operation in brackets, the final number you obtain represents the pure profit for every dollar (or your local equivalent) of sales, after covering all expenses. Multiply this number by 100, and you get your pure profit ratio.

While a 5%-15% ROS is the average for all profitable businesses, almost every entrepreneur aims for a 15%+ ratio, as it indicates efficient operations and strong product profitability. A general rule of thumb here is the higher, the better. However, if your ROS is 2%, it is still fine, as any ratio above 0 means your business brings money.

What influences ROS?

If you are already in business and have one or more projects underway, you should understand what factors influence your profits. We, however, hope that our list will include at least one item you have never considered before. And if there is more than one - perfect!

1. Operating costs. There are 3 cornerstones this factor stands on: production, labor, and distribution. The more you spend on these, the bigger the potential to get a lower ROS is. However, it is wrong to say that cutting the costs on these 3 is necessary. We are talking about efficiency, which plays the key role. Companies that optimize their working processes, invest in automation, and prioritize quality over quantity can lower operating costs and directly improve return on sales.
2. Pricing strategy. Yes, pricing in modern realia requires a strategic approach. Companies that implement dynamic pricing models often have better ROS. By dynamic pricing models, we mean adjusting prices based on factors such as time, customer segment, location, and demand. Be prepared to be flexible and adapt to market fluctuations and changes. However, you need to have a strong brand and clear differentiation to do so. For instance, offering constant discounts without a plan can lower profitability, despite high sales volume.
3. Product mix and margins. These factors influence the ROS marketing ratio just as much as others. The higher the margin of a product or service, the more ROS will improve without increasing sales volume. For instance, businesses operating in the retail sphere will require more control over operational efficiency than those relying on products that command a higher margin (e.g., SaaS companies or services offering customized solutions). 
4. Customer retention. At first glance, it may seem that the more unique customers a business attracts, the better it is. However,  the return on sales formula works differently. Attracting a new customer requires implementing special customer acquisition strategies that may be quite expensive. A business can maximize the value of every customer by launching loyalty programs, implementing personalized marketing strategies, and utilizing retargeting when necessary. This will contribute to higher ROS without increasing or implementing additional customer acquisition expenses.

ROS is about managing costs effectively, refining offerings, and focusing on high-margin opportunities, rather than just increasing revenue. Thus, answering the question “How to improve return on sales?” is not an easy task, but we will do our best to provide you with the most effective suggestions.

Recommendations on how to improve return on sales

From theory to practice. What can any business do right now, at that very moment, to improve its return on sales ratio? We can highlight 3 main actions that will require from business owners nothing more than expertise in their field and a desire to improve (and a bit of cash, maybe). 

Action 1: Focus on high-margin products

This is the most straightforward approach to improve ROS: prioritize products that have high profit margins. They usually require much less effort and advertising to sell and have a higher profit per sale ratio, meaning that you can generate the same pure income with lower revenue. 

Study the field you operate in and your product portfolio. If your business offers a wide range of products, focus on those with the higher profit margins. To do so, you need to understand the industry in which you operate and its specific nuances. That is why it is essential to open a business only in an area you are familiar with and have a good understanding of. 

A good example in this case would be the SaaS sphere. If a product has 2 subscription plans: basic and premium, it is a much wiser solution in terms of ROS to advertise the premium one. This ensures that all attention is focused on the product with higher marginality, guaranteeing it will attract more purchases and, consequently, increase your company’s return on sales.

Action 2: Optimize marketing spend

How to calculate return on sales considering the effectiveness of marketing campaigns? The dependence is direct here:  ROS grows when the profits from marketing campaigns increase. Thus, it actually makes a lot of sense to optimize marketing spend, and there are several main ways to do so.

1. Record the marketing ROI. Google Analytics and CRM software can help calculate the revenue-to-cost ratio.
2. Work with highly-converting channels. Monitor marketing activities and their effectiveness; do not hesitate to close the ones that do not yield good results. It would be more beneficial to reallocate the budget to campaigns and channels that generate substantial profits.
3. Pricing and discounts. Enhance customer engagement and margins by aligning your prices with reality. Offer discounts here and there to temper the atmosphere, but do not hesitate to cut them if you notice they are eating into profits.

There is no separate return on sales ratio formula for marketing spend. However, if you focus on the most profitable channels, avoid wasting your budget, and encourage your customers to interact with your business more, your ROS will most likely skyrocket faster than you can say “return on sales”.

Action 3: Implement server-side tracking

A thing many marketers and business owners overlook when it comes to improving ROS is the ways in which they track data and its quality. Server-side tracking, hosting a server-side GTM container, and utilizing various APIs (such as the Facebook Conversions API, TikTok Events API, etc.) significantly enhance data accuracy and control. Although it does not directly influence the ROS (you won't see an immediate increase after implementing server-side tracking), server-side tracking changes the entire approach and has a positive impact on marketing budgeting, campaign planning, and ad distribution. In its essence, server-side tracking affects 3 things:

• improves conversion tracking thanks to bypassing blockers;
• ensures compliance with privacy policies;
• guarantees better attribution thanks to the higher quality of the information on conversions.

Server-side tracking does not directly influence ROS but affects the factors that may improve it. This makes it quite a strategic choice if you want to get an immediate result and aim for noticeable growth in the future.

Pros and cons of the return on sales ratio

You may be surprised that “What is return on sales?” is not a rare question. It is a quiet metric, often ignored by marketers. At the same time, it is extremely useful for those who know how to use it. Let’s look at the great things about ROS and the issues you should be aware of.

A general rule of thumb is never to review the return on sales ratio on its own. Despite the ROS meaning in business, it may confuse you more than benefit if you do not combine it with other metrics for a fuller picture.

ROS in marketing

Return on sales ratio is a metric used in marketing to measure the profits a company or business generates and how efficiently the marketing budgets are spent to generate real revenue. Marketers can rely on this number to re-allocate budgets, optimize marketing strategies, and ensure that every launched campaign operates on its maximum potential. However, it is important to mention that the marketing mechanism is complicated, and ROS is not its only cogwheel.

Common mistakes that negatively impact ROS

The major mistake many marketers make is over-relying on discounts. In the short term, launching a lot of discounts at the same time may boost the ratios, but in the long run, it will erode the profit margins. Ignoring customer retention also affects ROS negatively, as spending on attracting new customers skyrockets. Not optimized marketing spend, of course, affects return on sales, as overinvestment into channels that do not perform well reduces the overall profitability of the business. Overall, the keyword for a good ROS ratio is OPTIMIZATION.

Tools and software for calculating and working with ROS

When it comes to the means of ROS analysis, there are plenty of titles covering different aspects of the process.

1. Google Analytics and Facebook Ads Manager are the standard tracking and management tools that any marketer should be familiar with. You can improve it by implementing server-side tracking for GA4 and advertising platforms to enhance the quality of data that feeds into ROS analysis.
2. Xero, Wave, or any other software used for financial analysis will calculate the net profit and operational costs for you.
3. It is never a bad idea to use business intelligence platforms to visualize the ROS and other metrics to understand the situation better and plan further moves.

Of course, we recommend using all these tools in combination with each other as this will provide you with the fullest data and maximum flexibility possible.

Conclusion

If you know how to find return on sales, how to operate it, and what important points to pay attention to, you get an additional powerful tool to analyze and optimize your business. ROS interlinks and cooperates greatly with other metrics and ratios. It basically covers the already existing holes in the analysis, such as the correlation of the profits a business gets with the amount of sales (which is not always direct). Considering that it is pretty easy to measure and utilize, there is no reason to ignore the return on sales ratio in your work.

FAQs

What is a good ROS ratio?

ROS above 0 means your business is already profitable. However, a good one depends on the sphere of business. For instance, for e-commerce, it is 5-8%, for hotels - 8-15%, and for tech - 10-20%. For less confusion, you can stick to the rule that the higher the ROS is - the better.

Is there a difference between ROI and ROS?

ROI measures the effectiveness of a specific investment. For instance, you launched a campaign and want to know how profitable it was. ROS, on the other hand, shows how much profit your business makes per dollar of revenue. It demonstrates the overall credibility of the marketing strategy.

How do you use the return on sales ratio?

ROS, also known as the return on sales ratio, is used to understand if the company’s marketing strategy is effective and if the high revenue numbers actually lead to increased profits. If not, it is necessary to review the overall approach, cut the discounts (if there are many active ones), and focus on products with higher marginality.