A Higher ROAS Is Always Better, Right? Not Necessarily

By October 28, 2013E-Commerce

A High ROAS Is Great, But What About The Lifetime Value Of Your Customers?

ROAS vs. LTVIn its simplest definitions, Return On Advertising Spend (ROAS) describes the profit made through advertising. Basically it’s a math game of dollars earned vs. dollars spent on an ad campaign. Marketing math-magicians figure out the ROAS by dividing ad-driven profits by the dollar amount spent on that advertising.

Having a high return on ad spending is a holy grail in advertising, because a higher ROAS means you’re making money. But it’s also important to keep track of one’s ad spending so you know what works and what doesn’t. Of course for all the data that can be compiled for your ROAS, many folks avoid it because they think the data is unnecessary. The value of the return on ad spending is completely dependent on the campaign that’s being run, they’ll argue.

So, how important is a high ROAS to your marketing success?

A closer look at what make a successful online ad campaign will help you to realize that striving for the coveted 5-to-1 ROAS might not yield you the long-term results that you want.

Taking A Hit On ROAS For The Bigger Picture…Lifetime Value

What’s the point, in the end, of wanting a higher ROAS? Let’s not forget what the ultimate goal is here, which is to have more sales for your products. One of the most effective ways to increase your sales for the long haul is to acquire new customers who’ll remain committed to your company for many years to come. Often referred to as a Lifetime Value (LTV), understanding the your customers LTV is important to reaching your overall goals. But how can you gain new and loyal customers? Often times you have to accept a lower margin of profit on the first purchase (get 25% off on your first purchase of …), which could directly impact your ROAS. But what if that new customer becomes a loyal one who spends money regularly for the next 10 years? Did a lower ROAS matter then? Not likely.

Conversions Aren’t Just About Sales

Your ROAS number relies on profit made directly from an ad campaign. But a successful ad campaign doesn’t always yield the most profit. While that may not make sense to you at first, hear us out. When your customers make a conversion, is it always about sales? For some folks, sure, that could be true. But for the overwhelming amount of online merchants out there, conversions could take on many roles. For example, your ad campaign could create an increase in catalog downloads, newsletter signups, or other trust-building actions that will eventually lead toward sales.

By making decisions based solely on a higher ROAS, you may overlook these important initial steps of building a customer base. Sometimes conversions aren’t just about sales.

Don’t Overlook Your ROAS, However…

It’s important to be in the driver’s seat of your entire ad campaign and strategy. The only way to remain in the driver’s seat is to have the most knowledge as possible at your fingertips. Keeping track of your ROAS can help you get a snapshot picture of the success of certain campaigns.

But you shouldn’t model an entire ad campaign based on coveted ROAS numbers. Each campaign has a unique purpose. Some campaigns should have an ROAS focus, while others should not. How can you differentiate between the two? Your best bet is to work with an ecommerce specialist who can help you design campaigns that fulfill the job they were meant to fulfill – such as increase sales, clicks, downloads, or whatever. ROAS is a key number, but it’s not the only factor involved. OperationROI can help you determine how best to strategize your ad campaigns. Call us at 1-888-277-5429 or fill out our contact form to find out how.

6 Comments

  • Steve says:

    “In its simplest definitions, Return On Advertising Spend (ROAS) describes the profit made through advertising.” — NO it doesn’t!! It tells you how many dollars in REVENUE you generated for each advertising dollar spent. In order to compare two metrics, it helps to actually understand what they are.

    • Greg Yevich says:

      Yes, Steve you are correct ROAS does typically describe revenue. However in this case we are discussing profit, due to the fact that the majority of our e-commerce clients track profit using different equations and definitions of ROI or ROAS. We have seen both ROI and ROAS defined by (X=revenue/spend) or (X=revenue-spend/spend). Since there is much confusion, we decided to look at profit. We discuss this, and the formula we were using for the article, in the second and third sentence “…it’s a math game of dollars earned vs. dollars spent on an ad campaign. Marketing math-magicians figure out the ROAS by dividing ad-driven profits by the dollar amount spent on that advertising.”

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