It blows my mind that a lot of PPC industry gurus still talk about ROAS as the “be all and end all” of performance marketing metrics.
I agree it ‘can’ be important.
However, judging success solely on reported ROAS is misleading because it over credits the short term in favour of the long term.
Let me explain:
You spend £100 on ads and acquire 1 new customer who spends £500. That’s a 5x ROAS. Well done you.
Your competitor has spent the same £100 to make £300 from three customers. That’s only a 3x ROAS. Ha, unlucky mate.
What your measurement platform doesn’t see, however, is that your single acquired customer doesn’t make any further purchases. Ever.
But across the road, the 3 customers your competitor acquired have gone on to make over £300 worth of extra purchases – each!
That 3x ROAS has turned into 12x ROAS!!!
Initial Spend: £100
Initial Revenue from 3 customers: £300
Measured ROAS: 300%
Additional Revenue over the next year: £300 * 3 = £900
Total Revenue = Initial Revenue (£300) + Additional Revenue (£900) = £1,200
Long-term ROAS = Total Revenue (£1,200) / Ad Spend (£100) = 12x
In the short term (30-90 day conversion window perhaps), it looks like you’ve performed best. But without further analysis and a dive into your LTV (customer lifetime value) and cross sell/ up sell potential, you’ve actually dropped the ball.
Of course, this is just illustrative of a scenario that could happen, but what I’m demonstrating is that by focusing solely on ROAS, you’ve missed the bigger picture. You’ve assessed advertising performance solely on ROAS measurement in a short attribution window.
Is your performance marketing team pushing the right products? Have you, as a business, identified those ‘gateway’ products that accept a lower return in the short term for a bigger payload in the future?
Of course, we all know why ROAS is a popular metric for ad agencies and freelance performance marketers. We need to justify our existence in the short term to retain the partnership. However, this myopic view of digital advertising often comes at the expense of long term business growth and truly maximising advertising effectiveness.
I’m not saying ROAS isn’t important or something you should measure, but it’s not the golden goose many think it is. You have to dive deeper.
Every business, market and situation is unique and success or strategy can’t be reduced to a single arbitrary metric.
Especially in the short term.