ROAS has done more harm than good to eCommerce businesses over the last 20 years. It’s time to abandon ROAS in favor of something actually helps businesses grow.
Most digital marketers live and die by ROAS, or return on ad spend. This metric measures the value of your marketing investment: for every one dollar I invest in a given marketing channel, how many dollars do I get back out in revenue?
ROAS has evolved over the years, from last click attribution to more sophisticated delayed attribution models developed by advertising platforms like Facebook. But no single platform has complete visibility into a consumer’s activity, so no attribution model will ever be perfect.
And that would be ok if marketers used ROAS as a guide, or as one of many data points that shape their understanding of a business. But in 99% of cases, that’s not what happens.
In the majority of businesses I’ve worked with, and for the majority of marketers and retailers I’ve spoken to, not only does ROAS dominate the marketing conversation—it dominates the financial planning conversation. And that is where ROAS becomes a path to financial ruin.
ROAS Actually Discourages Growth
Some customers are harder to convert than others. We know that it takes more resources to convert a prospect than it does to win an order from an existing customer. But what many marketers don’t fully realize is that customers become easier to convert again the more orders they place with you.
A customer who placed five orders is actually much cheaper to retain than a customer who only placed one.
ROAS-first marketing encourages marketers to go after low hanging fruit at the exclusion of everything else. Customers who are easier to convert will always yield a higher ROAS. The algorithms governing the advertising platforms will skew targeting towards these customers. And marketers themselves will prune away lower ROAS campaigns, amplifying this effect.
What will happen to a business that uses campaign-level ROAS as its north star? Average customer lifetime value will decline, and the loyal customer base will stagnate. But campaign-level ROAS will look great…for a while.
Eventually this business will reach an inflection point where revenue from the loyal audience gets tapped out. ROAS will gradually, then suddenly, decline, despite no change in campaign-level tactics.
ROAS Should Not Be a Financial Planning Tool
The way financial forecasting and planning works in most eCommerce organizations completely overlooks the fact that you need customers to make a business. What I have seen time and time again: finance says “We can allocate 10% of projected sales towards digital marketing. So digital marketing activities need to yield a blended ROAS of 5-10x.”
This is where ROAS targets often come from—the P&L plan. This budgeting strategy assumes that customer acquisition efforts are happening somewhere offstage. Unless you have discovered the latest and greatest marketing channel arbitrage hack, you are not consistently acquiring customers at a 10x, or even a 5x return.
This is where ROAS runs businesses into the ground. Let’s say a business plans up sales by 10% this year. Why? Because we grew 10% last year—no need to dig deeper than that. Inventory levels are increased around 10% to support this plan, and so has the digital marketing budget. But the ROAS target is still unsuitable for customer acquisition.
What neither finance nor marketing realize is that sales were up last year due to a lucky break. A single new product really resonated with a small group of influencers on a new social platform, driving lots of organic customer acquisition. This year, that product has been discontinued and the organic trend has died down.
So what happens? The marketing team runs last year’s ROAS-focused playbook. But without the serendipitous boost, they’re unable to hit last year’s ROAS targets. The new inventory languishes on the warehouse floor. Deep markdowns ensue.
Why Is ROAS So Popular?
There are a few reasons that ROAS has risen to the top of the marketing heap, despite its limitations.
The first is a lack of good alternatives. Google built a great product for measuring ROAS with its Analytics suite. Just stick a few lines of code on your site, add some tracking parameters to your campaigns, and all the data you need will flow seamlessly into their platform (even if the data is misleading).
A better analytics system would show a marketer how customer acquisition, nurture and loyalty were contributing to sales trends in the business. And it would break out the costs and profitability of the marketing activities associated with each of these customer lifecycle stages.
Unfortunately, it’s almost impossible to build out a plug and play solution that delivers these metrics. Data schema varies by eCommerce platform, and the quality of the data itself tends to get messier the longer a brand is in business.
The second reason is that ROAS is a great metric for careerists who like to play dirty.
If you’re a relatively experienced marketer looking to squeak out a few “quick wins” on your way to your next promotion, ROAS is an easy metric to manipulate.
Just think of all of the agencies who shift paid search budget into branded campaigns to goose ROAS, or the new email marketing hires who shock and awe the VP of eCom by launching an abandoned cart campaign that drives 10x ROAS.
Neither of these activities produce incremental revenue. They just shift around existing demand. That is why you’ll sometimes observe periods where marketing is “crushing it” but topline business results are tepid.
How Do We Move On From ROAS?
This is going to be the least popular section of this hot take, because I am going to tell you to do something hard. You need to shift your understanding of the business from channel performance to customer performance.
If you typically forecast marketing channel contribution to your sales goal, you should start forecasting contribution by customer type (acquisition, retention, etc.).
If you’ve historically run campaigns that serve the same message and products to broad audiences, you should start developing different strategies (and budgets) for prospects, new customers, and deeply loyal customers.
And if last-click ROAS has been your measure of success, you should start audience-based holdout testing to determine if your campaigns are really driving net new revenue.
All of these steps require marketers to become more familiar with their data and the nuances of their business. But these changes will make your marketing and eCommerce career more anti-fragile in the long run.