It’s no secret that Return On Ad Spend is one of the most overly-used metrics in digital advertising. It’s a great way to quickly evaluate the performance of your business, and it works well for all sizes of companies. However, there are plenty of issues with using ROAS as your core or only performance metric that matters. If growth is in your marketing plans, leaning on profitable or consistent ROAS could set you up for a fall.
One of my favorite examples of how ROAS can be misleading comes from Neil Patel, who points out that “a business with a 3x ROAS is in good shape if it is making $1m in revenue, but probably not if it makes $100m.”
The problem with this metric is that it’s an average. It doesn’t tell you how performance changes with scale and there’s no way for you to know whether a 3x return on ad spend means your business should be profitable or not based on their current revenue level.
ROAS is a great metric for identifying if your business is healthy, but it doesn't show how performance changes with scale.
You might be thinking “well I need some sort of metric that tells me how my company performs.” And you’re right, ROAS is a good snapshot of how things are performing right now. ROAS isn’t enough by itself. Why not? because it’s an average and averages don’t reflect nuances or changes in budget or business direction.
Other factors are going to impact your ROAS too – like how you measure it. A client of mine used to complain how their competitors were getting great ROAS from a platform that had a lot of attribution options. But they never wanted to move from a last click attribution window, or ask how their competitors measure ROAS. Everything changes based on the window you look through.
Simply put:
A high ROAS is an indication that you’re not pushing the business and a low ROAS is a sign that you’re either trying to grow or things are getting tough.
That’s it.
At this point it would be great for everyone in marketing to just admit that there’s no such thing as an ideal performance metric—it’s all relative and depends on a number of factors. What kind of growth stage the company is in, the nature of the product, the lifetime value (LTV or ARPU) of a customer etc., etc.. But here are some things to keep in mind when looking at performance metrics:
Instead of using an average, use a metric with more staying power
In place of ROAS, why not just break it down to the sum of its parts – we know the ad spend so we know what the revenue target is for the business. Take the average out and look at that rev target. (Clearly if your target is leads – focus on volume and CPA).
(math alert)
If you have a $5k spend and are expecting a 5x ROAS – make the performance KPI $25k
The question you ask then becomes – is revenue on pace, below or ahead? The answers then dictate the action you need to take.
Use trends to diagnose and troubleshoot
Trends of your performance metrics are going to tell you a lot more. How are they trending over time? Are you seeing any patterns that indicate success or failure?
To see these trends more clearly – be very clear on KPI’s for different activities and types of campaigns. If you’re bidding on Brand terms in Google (and you should) – know your average cost per acquisition. Benchmark the averages for each of your Google activities from shopping, display and remarketing and set those benchmarks for each.
Learn the range of benchmarks for your campaigns in your Meta ads platform. Set your expectations that your prospecting is going to be more expensive than your remarketing or retention efforts.
These benchmarks do require a healthy account structure to be consistent – that means negative keyword lists and exclusions on these campaigns.
The next time you need to evaluate the performance of your ad campaigns, factor in context.
Ad campaigns, no matter the platform, are going to be inconsistent day to day. WebSavvy recently did a deep analysis of a client’s Google Brand performance over a long period of time. We excluded any sales days and found that the median volume of clicks or revenue generated could fluctuate greatly. The reason for this? Simply put – there are people at the other end of those mobile devices and they don’t act the same way every day.
Your prospecting campaigns will be even more erratic – whether that’s non-brand or meta campaigns. But understanding the trends and what the KPI for these campaigns should be in relation to themselves will help you find out if there’s more opportunity there or if you’re hitting diminishing returns.
It's time to rethink our metrics and focus on more detail than an average provides.
Wrapping up – stop leaning on ROAS as a summary metric. Go in depth
- Set your marketing target at an actual number like a revenue target. (or lead volume if that’s your business)
- Set KPI’s that are appropriate for the activity – If you’re keen for growth –
focusing on customer acquisition costs - Know your benchmarks for each activity to help diagnose and troubleshoot
Need help?
WebSavvy specialises in helping small to medium sized businesses grow. If you’re looking for some direction about your digital strategy we’d love to help – reach out to us at hello@websavvy.com.au
About Trevor Henselwood
Trevor is the Head of Growth at WebSavvy, digital specialists based in Melbourne. Trevor has helped major Australian businesses grow including Showpo, Adore Beauty and the Sheet Society, and has been a keynote speaker at Digital Marketers Australia. He has a passion for great stories and creative strategy, helping brands develop messaging that connects with their audience.