Many companies steer their marketing wheel based on Return on ad spend (ROAS), resulting in under-investment and short-term thinking and killing growth. ROAS is a metric that is more damaging to our businesses than we think, maybe even more than ROI. But we have fixed this problem within Billy Grace.
ROI has been problematic in the past, but ROAS is doing more damage to businesses while lurking in the shadows. However, ROI and ROAS have been and still are the anti-growth twins’ damaging businesses.
We have struggled with these metrics, but it hasn’t stopped us from trying to find new metrics resembling long-term growth. We know that the bottom line is that marketing efforts need to be profitable, but sometimes profit is not always short-term work.
Before explaining why ROAS is a bad guy, let’s first lay out the issues with ROI.
The problem with ROI
Return on investment (ROI) negatively correlates with growth because when returns stagnate, your ROI will decrease as you spend more and will increase as you spend less. In other words, to increase your ROI, just spend less.
Hence, If your main focus is increasing your ROI, you will consequently be spending less, resulting in less growth. This illustrates that ROI is not a metric of effectiveness, but efficiency. Therefore, instead of using ROI as a target, utilize it to assist you in evaluating the worth of your media spending.
To increase growth, you should focus on s prioritizing incremental profit or revenue.
How ROAS is utilized
Many marketers use ROAS as a buying objective in the real-time optimization of performance activity across various platforms and channels.
Moreover, the ‘return’ means the sale that occurred when the advertisement was shown. For example, If someone sees an ad and buys within a certain time range, those sales are attributed to the activity.
ROAS is a favorite of digital marketing and finance teams. They enjoy the immediacy, predictability, and near-instant response of the platforms and their algorithms, as well as the certainty that if they enter the number into the adtech, it will result in a sale.
The problems with ROAS
For starters, many firms’ strategic layers view ROAS as a target metric and a leading factor in marketing decision-making. As a result, short-term thinking leads to under-investment and de-prioritization of longer-term activity, crippling growth.
ROAS creates an illusion
The ‘return’ refers to the total sales from consumers targeted with adverts within a specific period. For example, if someone purchases something immediately after being targeted with an ad. In that case, the platform considers it a ‘gain,’ even though the consumer was exposed to your brand for weeks. Therefore, taking credit for all the channels that also contributed.
Resulting in channels competing with each other instead of working together. Since ROAS only measures what happens in the final moments of the sales.
Chasing easy sales
If a large portion of an audience is already close to buying, the ROAS will likely be high. But these are people that already know that brand. But a business cannot rely on them, since only a tiny portion will probably turn into returning customers when they have bought that product. You cannot rely on existing soon-to-be customers and returning customers.
Marketers need to fill their funnel with consumers that are further away from their buying decision; this will naturally lead to a lower ROAS. Businesses cannot keep focusing on things that instantly deliver and turn everything else off.
ROAS also negatively correlates with growth
Light buyers contribute a significant amount of brand growth, but focusing on high ROAS may cause you to target more heavy buyers, limiting growth. Brands may become excessively inward-looking and preoccupied with serving their current customers rather than expanding the number of new customers.
Similar to ROI, ROAS has also been misrepresented as a growth indicator. In fact, ROAS seems to have been specifically designed to keep brands small.
A Flawed view of how advertising works
Advertisers focusing solely on ROAS (return on ad spend) may miss the bigger picture regarding digital advertising. While it is undoubtedly essential to see a positive ROAS, ads must be considered part of a larger whole to be truly effective.
Ads on any given platform do not exist in a vacuum – they are just one part of a rich tapestry of thousands of little touches that combine to gently contribute to maintaining or increasing sales.
Most advertisers exist to maintain or increase sales rather than drive awareness, consideration, and conversion. Therefore, it is essential to consider all aspects of advertising, not just ROAS.
How Billy Grace wants to change the digital world.
Many of our clients ask us questions on how to scale their businesses most effectively. For example: “What metrics do I need to keep in mind when making marketing decisions?”
Luckily, every member of the Billy Grace family has a digital marketing background and knows how marketers and businesses approach marketing. Therefore we want to change the way marketing is approached.
We believe long-term growth is attracted when creating awareness in audiences that are not yet familiar with your brand.
Within Billy Grace, we have designed metrics that are engineered explicitly for long-term growth and branding. At Billy Grace, we believe that marketing should be a holistic approach across all channels, and we must align all channels so that they are measurable as a whole whilst also being able to track your audience every step from first exposure to purchase and beyond.