ROAS Alone are Old School Tactics

Marketing is one of the jobs that changes the most quickly. This is especially true for digital advertising, buying media, and performance marketing. The job of a marketer today is very different from what it was like on Madison Avenue. A digital marketer from 2018 (which isn't that long ago) would be lost in a modern Google Ads account without thousands of keywords to fine-tune.

And the speed with which digital marketing is changing has led to a lot of interesting conversations:

• How will marketers change when cookies are no longer used?
• How can marketers prepare for the future by getting better at certain skills?
• What are the most important controls that marketers can use with black-box campaigns like performance max?

One of these topics, the metrics we use to measure performance, seems to have taken a back seat while cookies have been getting all the attention. There are a lot of metrics we can look at and improve, which leaves marketers wondering: which ones really matter? Let's go on a trip from CPC to CPA to ROAS and even further.

CPC

When Google Ads (used to be called AdWords) and keyword-level optimization were popular, CPC was king. Cost per click was one of the best ways to figure out how well we did. But even though it told us how cheap our traffic was, it didn't take into account how good each person who clicked on an ad was. For example, if you sell high-end furniture, would you rather get a lot of traffic with low CPCs from people who aren't interested in buying? Or would you pay more per click for wealthy luxury shoppers?

CPC is and will always be a metric we keep an eye on because it helps us figure out how our platforms compare to the competition or how changes we make affect users. CPCs don't have much more to offer after this point.

CPA

We started to optimize for conversions because we could track them better and we wanted more people to do good things on our websites. Cost Per Acquisition (or Cost Per Action) became the most important marketing metric, and campaigns were changed to get as many conversions as possible.

Getting conversions is a good goal, but not all of them are the same. Think about being an online store that sells vitamins. We lose sight of the fact that selling one bottle of vitamin C is not the same as selling the latest version of multivitamin when we optimize for CPA.

ROAS (Return on ad spend)

ROAS was a step up from CPA because it helped campaigns and marketers figure out how much money they were bringing in.

ROAS is the advertising version of ROI, but that doesn't help you much if you don't know what ROI means. ROI stands for "return on investment," while ROAS stands for "return on ad spend." To make ROAS easy to understand, we measure how much we make for every dollar we spend on advertising. Some marketers figure it out as a percentage, others in their own currency, and sometimes it's just a number. To figure out how much money we make from advertising, we divide it by how much we spend on advertising.

ROAS is similar to CPA in that it helps us figure out which campaigns, ad groups, or ads give us the most for our money.

ROAS formula

Your return on ad spend (ROAS) should be more than 1. If it's less than 1, you're spending more on ads than you're making in sales.

Also, some businesses find it hard to figure out how much money your advertising campaign brings in during a certain time period. A B2B construction company, for example, might use an ad campaign to get leads. To figure out ROAS, you will need to come up with a monetary value for each conversion on your website. This is because it could take months before a lead turns into money.

CPCs, CPA, and ROAS are important. When it comes to reporting and optimization, they are the usual suspects, but they don't think about the more long-term, strategic business goals.

Moving away from ROAS, CPA, and CPCs

ROAS is used as an end point by some marketers, but it is not the only metric that matters. There are better measurements out there for three reasons.

• ROAS is no longer tied to volume.
• ROAS looks at short-term revenue. ROAS assumes perfect attribution.
• I'll look into these problems and come up with workarounds or new metrics to help you fix your reporting.

Challenge No.1

ROAS is not connected to volume.

Let's get a little bit more technical and talk about volume and incrementality.

But before we do, we want to thank Fred Vallaeys from Optmyzer for giving a great talk on the anatomy of the modern marketer and introducing this idea of incrementality with ROAS.

If you're the CMO and your team tells you that your ROAS has reached a new high of 3 this month, that's great! But then the sales team comes to your door to say that sales are way down from last month. If you only look at ROAS, you might forget about other metrics and start giving up on volume. This is an exaggerated example, but it shows a possible pitfall for marketers:

While January's ROAS was lower, it brought in more money.

As we've seen, it's possible to aim for a ROAS that's too low and forego profit, just as it's possible to aim for a ROAS that's too high and drive up costs. The following chart illustrates this point.

We can explain in greater depth how to locate this green, goldilocks zone of ROAS and how to stay away from the other areas:

If you want to stay out of the red zone, make sure your return on investment is more than 1.

If you want to stay out of the yellow zone on the left, you need to start tracking incremental ROAS. Our return on ad spend (ROAS) may be fine even if we're losing money on the extra money we're spending on ads.

Finally, you want to maximize your return on ad spend (ROAS) while keeping an eye on your conversion volume to make sure you're not putting too much emphasis on ROAS at the expense of volume, as shown on the right side of the graph.

As our return on investment in March was larger than 1 (1.75), it makes sense to increase spending during that month. The return on investment seems reasonable.

But, if you take into account that the extra $200 we spent between March and February only earned $175, you can see that we are losing money. As we are more profitable at this ROAS, we should revert back to February's spending levels of $300.

You need to constantly growing your advertising spend while tracking your incremental return on investment in order to stay in the positive ROI territory. Maximize your spending when the incremental return on investment is greater than 1.

Challenge No.2

Which statistic shifts your focus from the short to the long term when evaluating your performance?

When a customer makes a purchase or completes a transaction, that is not the end of their journey. As a result, we fail to account for the supplementary income that repeat consumers and subscribers generate. Ignoring the full scope of the customer's experience is shortsighted. To answer your question, let's talk about LTV.

The value of a customer throughout the course of their lifetime, as estimated by your company. If a consumer buys a newspaper for $2, for instance, you might conclude that they are not worth spending much on marketing them. By shifting your perspective to one of LTV, you may discover that the vast majority of your consumers will continue to subscribe to the same weekly newspaper for the next two decades. If that's the case, the LTV of just one new customer is $2,000!

Having an idea of a customer's LTV helps with long-term growth planning and profit considerations.

Challenge No.3

Which statistic should we use to assess the marketing department as a whole?

A Facebook ad could be the initial point of contact between your brand and a potential customer. A few weeks later, they hear a YouTuber they follow recommending your brand, so they do a search for it, click an ad, and check it out. Their first purchase doesn't come until a few days later, when they see one of your display ads and remember you.

How much money advertising actually brings in is unknown.

This disorganized user experience is typical. While ROAS strives to do so, it is impossible to credit all revenue to individual advertising campaigns.

It is impossible to assign a fixed percentage of sales to a single channel, therefore top-of-the-funnel efforts will always be penalized when calculating return on investment. Pursuing marketing analytics that focus on conversions ignores the value of building brand recognition. Without it, progress may stall.

A better all-encompassing statistic for learning about marketing as a whole is required. The MER method is the answer.

You may gauge the efficacy of your marketing campaigns with the help of MER.

Revenue is divided by advertising expenditures across all channels to arrive at the Marketing Efficiency Ratio (MER). It's very similar to Return on Ad Spend, with the key difference being that we're looking at aggregate data rather than granular ad or channel-level data in order to get a sense of the whole impact of our marketing initiatives.

When you switch from Return on Expenditure to Marginal Effectiveness, you no longer have to worry about the difficulty of assigning responsibility for results but can instead concentrate on optimizing results as a whole. There is no longer an issue with optimization efforts being skewed too heavily toward campaigns that aim to increase conversions. Because of this, you can have a deeper comprehension of the effects of shifting resources between brand-building and direct-performance initiatives.

Using ROAS is like looking at an ant colony through a microscope; you might learn a lot, but you might also miss the forest for the trees. The MER is the missing metric for seeing the big picture and how your marketing initiatives are contributing to success.

You can begin implementing these new data into your reporting and optimization processes immediately.

On what should I report?

Long-term brand expansion requires attention to the full marketing funnel and an awareness of the factors that influence business revenue. We can't just ignore CPCs and ROAS altogether. Instead, we should look at these figures with new eyes, cognizant of the traps inherent in marketing measures, and comparing them to the indicators that truly matter. This is one of your assignments if you don't already have a system in place to track LTV and MER.

On what should I base my bid strategy for my advertising campaigns?

The purpose of this post is to help you better understand the potential pitfalls of return on ad spend (ROAS), not to panic you into abandoning your ROAS-based bidding strategy immediately.

Nowadays, target ROAS is the best Google Adwords strategy for most bottom-of-the-funnel campaigns with high-quality data feeds back into ad platforms. Nonetheless, we need to work on increasing the revenue figure.

Is lifetime value an option in place of straight up revenue in this case? Is it possible to make these values variable and adapt to each client and geographical area? Is it possible to improve your top-of-the-funnel campaigns based on ad impressions or website traffic instead?

Accept transitions

Since we stopped tracking ad impressions and started tracking conversions, we've been focused on the here and now rather than planning for the future to fuel sustainable growth. In order to better measure, optimize, and report on performance, marketers need broaden their scope to include metrics that are more easily understood by businesses. I can't stress this enough: begin incorporating MER and LTV into your assortment of metrics.

Finally, before we wind off here, it's important to remember that the marketing landscape is constantly evolving, so it's unrealistic to treat this as gospel moving forward. Changes in optimization and reporting best practices are to be expected as ad platforms develop and more data becomes available. Now, MER and LTV are taking the spotlight from ROAS. But we must all remain alert, for the next technological revolution will inevitably usher in a more suitable acronym.