By Per Pettersen on October 20, 2015
In most recent digital advertising literature and writings, ROAS, or Return On Ad Spend, has been the dominant metric used by marketers to analyze the success of their marketing efforts – replacing old school metrics like Return On Investment (ROI).
In the current digital advertising environment, with so many channels, devices, and strategies, the question is: which metrics should a marketer focus on to achieve the greatest amount of marketing success?
What is ROI and What is ROAS?
In simplified terms, ROI takes a bottom line approach and ROAS is a more tactical tool to measure effectiveness. Marketers often mistakenly mix up the terms and incorrectly use them interchangeably.
ROI measures the actual profit generated by a specific buy or channel relative to the media investment. It is a metric that speaks to the bottom line return on media capital deployment on a specific ad or media partnership. You can see this in how it is calculated below:
ROI = (revenue – costs) x 100 / costs
ROAS, on the other hand, is a measurement that evaluates gross revenue generated for every dollar spent. Since businesses typically sell individual merchandise with different gross profit margins, each marketer would typically have very different ROAS targets – in order to maintain a profitable business from a specific campaign.
This is exemplified in how it is calculated:
ROAS = revenue from ad campaign / cost of ad campaign
If you choose to use ROAS as your metric, your view would typically be that marketing campaigns are needed for doing business.If you choose to use ROI you should be more focused on the incremental impact on the bottom line of each campaign.
Both metrics can be useful in optimizing your campaigns, particularly when used together, but if one uses only ROAS blindly – one might mistakenly end up with a media mix where there are many buys that do not contribute to, or worse detract from, the overall profitability of the program. It is time marketers evolve to the next generation of analysis and take incrementality and actual profitability into consideration when optimizing their campaign.
ROAS: Media Expenditure as a Cost and Not an Investment
The ROAS model can lead to an increase of spending across all channels using a market share gaining view. The problem with this is that each buy, keyword, ad or partner can have massively varying gross profit margin and when calculated with ROAS, this is not recognized.
In the affiliate sector which is near and dear to our heart here at Impact Radius, a coupon site is certainly more likely to have a lower margin than a blogger. This is because their sales are much more likely to include a consumer discount. The same thing applies to paid search. Different keywords can drive sales of completely different merchandise with different average order values and gross profit per average purchase.
The beauty of ROAS is that it is easy to compute and does not include sharing extensive confidential information inside of an un-encrypted conversion pixel, hence why many ad/mar-tech vendors utilize this metric extensively.
This has helped conditioned marketers to think about market share vs. evaluating the incrementality of each buy on a stand alone basis.
Multi-Channel Consumer Journeys
Compounding the problem of this analysis and decision making is the fact that most consumers are touched by many different free or paid media sources across multiple devices on their journey to a purchase.
In the existing world of last click and ROAS-based analysis, we treat each buy with its respective costs isolated within their respective channels.
Last click ROAS does not allow for a true understanding of the cross-channel effect and the role each channel plays in the consumer journey.
What’s the Solution?
The true “holy grail” for optimizing a digital marketing mix would be to use the ROI metric, but to move beyond the simplistic last click methodology and essentially assign a fraction of a conversion’s gross profit to each touchpoint in the consumer journey.
If your vendor or company policy does not allow for the sharing of this needed information, look at your merchandise mix and rebating levels associated with each buy.
With ever-increasing competition in the digital marketing world, marketers will be held responsible for their choices in metrics and the results they deliver. This transition will have a profound impact on agencies and tech vendors whereby they will be accountable for bottom line impact, as they should.