Going Beyond ROAS: Is Your Performance Marketing Profitable?

In the world of digital marketing, Return on Advertising Spend (ROAS) has long been the golden metric for assessing the success of performance marketing campaigns. Advertisers and marketers have relied on ROAS to gauge their return on investment (ROI) and measure the effectiveness of their online advertising efforts.

While ROAS is undoubtedly an essential indicator, relying solely on it can lead to misleading conclusions about the actual profitability of your performance marketing endeavours. In this blog, we will explore the limitations of ROAS and discuss the need to go beyond this metric to ensure true profitability.

Understanding ROAS:

ROAS is a simple and widely used metric calculated by dividing the revenue generated from a marketing campaign by the cost of the campaign. For example, if a campaign generates £1,000 in revenue and the ad spend is £200, the ROAS would be 5x (£1,000 / £200), indicating that for every pound spent on advertising, there was £5 in revenue generated.

The Limitations of ROAS:

While ROAS can provide a quick glimpse into the revenue generated per advertising pound, it fails to account for various factors that significantly impact overall profitability. Here are some of the key limitations of relying solely on ROAS:

Cost of Goods Sold (COGS): ROAS does not consider the cost of goods sold. If your product margins are low, achieving a high ROAS might still result in a loss when factoring in the expenses associated with producing and delivering the product.

Post-Purchase Costs: ROAS focuses only on the initial transaction. It does not take into account post-purchase costs like customer support, returns, or warranties. These costs can substantially impact the overall profitability of your marketing efforts.

Customer Lifetime Value (CLV): ROAS treats all customers the same, regardless of their long-term value. In reality, some customers might make repeat purchases, become loyal advocates, or refer others to your brand. Ignoring CLV leads to an incomplete picture of your campaign’s profitability.

Attribution Bias: ROAS often attributes all credit for a sale to the last-click or last-interaction ad, ignoring the role of other touch-points along the customer journey. This bias can misallocate marketing resources and overlook the impact of top-of-funnel activities.

Moving Towards True Profitability:

To ensure your performance marketing efforts are genuinely profitable, it’s essential to move beyond ROAS and consider a more holistic approach. Here are some strategies to achieve this:

Calculate Profit Margin: Always calculate your profit margin by deducting the COGS and other variable costs from the total revenue. This will give you a clear understanding of the actual profit generated by your campaign.

Include all Costs: Factor in post-purchase costs, ongoing advertising expenses, and any other relevant costs associated with your marketing efforts to get a comprehensive view of profitability.

Customer Lifetime Value (CLV): Understand the CLV of your customers. Identify high-value customers and invest in strategies to retain and upsell them.

Multi-Touch Attribution: Implement a multi-touch attribution model to give credit to all touch-points in the customer journey. This will help you allocate resources more effectively and identify which marketing activities contribute most to conversions.

Experiment and Iterate: Continuously test and optimise your marketing strategies. Monitor not only short-term ROAS but also the long-term impact on customer retention and overall profitability.

In Conclusion:

ROAS is undoubtedly a crucial metric for evaluating the initial success of your performance marketing campaigns. However, to determine true profitability, it’s essential to consider the complete picture. Factor in all costs, understand your customer lifetime value, and embrace a more holistic view of attribution. By doing so, you’ll be better equipped to make data-driven decisions, maximise your marketing ROI, and achieve sustainable and profitable growth for your business.

Get in touch with Al at alan@roar-studios.com to discuss our tried and tested Digital / Commerce P&L modelling, which accounts for all of the above.