ROAS: The Worst Marketing Metric?

ROAS (return on advertising spend) is a marketing metric that has been around for decades. While helpful, it's incomplete - marketers have been leaning on it as a core KPI for too long. Here are four reasons why I hate using ROAS (in isolation) as an indicator of the success or failure of a campaign:

• It Ignores Profitability

  • ROAS is calculated as gross sales divided by the spend on advertising, but ignores variable cost of goods. If we're looking at true return we need to include the variable costs at some point in the calculation of results.

    
    

• Scalability Generally Reduces ROAS

  • As you scale campaigns, your returns are typically less. A sole focus on ROAS will generally cause marketers to end campaigns too early, not maximizing its potential.

    
    

• It Can Become Convoluted with Recency Bias

  • ROAS looks great on campaigns like retargeting or branded search. Customers have already likely heard of your brand, or, have visited your website and have responded as after multiple previous touches, over-inflating the value of the campaign.

    
    

• It Ignores LTV (Lifetime Value)

  • This is probably the biggest reason I hate using ROAS in isolation - it completely ignores lifetime value and potential of the guest. If it costs you $20 to acquire a customer, and they only spend $20 on their first visit, the advertising program would be deemed a failure just looking at ROAS. Customers typically tend to spend less with you while they are trying you out for the first time. What if 50% of these guests return for a second trip and spend 20% more on their second trip? The long game is absolutely critical to a company's success.

If you have questions about your current advertising campaigns, want to start a new one, or, would like us to help you develop a strategy to evaluate your campaigns and KPIs, contact us today!