Marketing 101: Why ROAS Should Not Be Your Key Performance Indicator

Posted on October 29, 2018

E-commerce marketers today are increasingly hyper-aware of the metric return on ad spend (ROAS). It sounds great and optimizing for it can make you look great as a marketer. But what if optimizing for ROAS above all else is really just a trap causing your brand to miss out on significant opportunities for growth?

ROAS is calculated by taking the total revenue generated from an ad campaign and dividing it by the cost of that campaign. This is short-sighted because it fails to calculate other costs associated with each sale. Thus, you’re not taking the full picture into account. More specifically, you’re not taking into account important metrics such as the cost of goods sold, fulfillment, and lifetime purchases.

You must take things a step further to ultimately determine and analyze the profit return on ad spend within your marketing efforts. This metric will show your true return on investment because it takes into account those variables specific to your brand and the full scope what you’re spending on certain products.

As a result, it will give you the best idea of what you should spend going forward in order to acquire more customers.

For example, let’s say you’re selling a $200 pair of boots that cost $30 to sell. Your ROAS is telling you that you’re profiting at six times more than what you’re spending. You’re going to have a higher average order value and you can theoretically spend more to acquire. So on paper, that’s great.

But let’s say that boot costs an exceptional amount more to ship and fulfill than your other products. Your margins will be lower as a result and you won’t be as profitable because you aren’t taking your profit return on ad spend into account. Whereas you could have another product that might have a lower average order value and a lower ROAS, but because it costs significantly less to make you take home more money at the end of the day.

Let’s say you’re selling socks that cost $1 to make and you sell them for $14. Your cost to make these socks is significantly lower than with the boots. Your ROAS is technically not going to be nearly as impressive, but your business has made more money when you look at the full scope.

The focus on optimizing for profit return on ad spend can also help you push towards acquiring the right types of customers while prioritizing for customer lifetime value, which ultimately should be your overarching guiding metric as a brand. Otherwise, you’re going to make decisions based on short-term metrics that will hurt the overall welfare of the company.

When it comes down to it, marketers are always going to optimize for the metric they think provides the most job security. Obviously, this is why ROAS has become such a popular measuring stick. Showing off an impressive ROAS is certainly appealing to a lot of people.

But when you’re only optimizing for that, you’re cutting corners. You need to be focusing on the data, measuring and optimizing for different factors beyond ROAS. If you’re only optimizing for ROAS, you may be hurting yourself in the long run from a business perspective. When done well, optimizing for profit return on ad spend can allow you to think of your ad spending as an investment that will grow your brand rather than thinking of it simply as an expense.

Remember, you have to be able to measure it in order to manage it. And without optimizing for profit return on ad spend instead of ROAS, you aren’t measuring the elements you need to successfully manage your brand.