At the Traffic and Conversion Summit 2021, we had the honor to listen to a wide variety of speakers that shared their knowledge and passion with us. One popular session was run by Allison Simms and Luke Austin, who are growth strategists with the Common Thread Collective. They joined us for a session to talk about why ROAS is actually a terrible metric. Then, they took a closer look at three different metrics that actually drive profitable growth for companies of all sizes. Take a look at how you can apply this information to your own company.
The Deficiency of ROAS: The Return on Advertising Spend
So, let’s take a closer look at ROAS, which stands for the Return on Advertising Spend. This is a popular marketing metric that supposedly measures the efficiency of a digital advertising campaign. You make a significant investment in your digital marketing campaign, and you want to make sure you are getting the return you expect.
To calculate ROAS, you take the revenue attributable to ads and divide it by the cost of your ads. For example, if you invest $10 in your ad campaign and you make $25 in revenue from those ads, your ROAS is 2.5.
This is a pretty straightforward metric, so what is wrong with it? The metric does not take into account any organic conversions. These are conversions that would have happened regardless of the money you spent on that channel. We have been wired to think that inputs and outputs are directly related, and this metric sometimes assumes causality when none is there. That is why this metric is so faulty.
There Are Better Metrics Out There
Fortunately, there are much better metrics you can use to help you gauge the efficiency of your marketing campaign. Three metrics you should track instead of ROAS include:
- MER: MER stands for marketing efficiency ratio. This is calculated by taking your total revenue and dividing it by the total paid media spend. This is a better metric because it acknowledges that you are using all of your revenue in your calculation instead of just revenue coming from ads.
- ACOS: This stands for advertising cost of sale. This is a metric that helps you measure the performance of your marketing campaign. This is calculated using your ad spend divided by your sales revenue. It helps you focus on your costs instead of your returns, which are not always reliably attributed to your ads.
- LTV:CAC: This is your lifetime value per customer / your customer acquisition cost. This helps you understand how much money you are spending to acquire customers while also taking into account how much money each customer generates for your company.
If you want to understand what parts of your advertising campaign are working and what parts are not, track these metrics regularly. That way, you can figure out what changes you need to make to maximize the efficiency of your marketing campaign.