Ask any business owner or CEO if they want to grow their business and they will ask you if it’s a loaded question. They will always say yes to the question of growth, it’s their job to grow revenue and increase profits. Ask the same person what the goal of digital advertising is and they will tell you that they want more sales or sales leads either in-store or online. All of these equate to revenue.
Isn’t ROAS the goal of digital advertising?
No it is not. Make ROAS the goal and you will restrict growth opportunity. ROAS (return on ad spend) and CPA (cost per acquisition) are both KPIs (key performance indicators). KPIs are a very useful way to determine how effective your digital advertising spend is tracking towards your revenue goal.
Targeting a higher ROAS or lower CPA can decrease revenue, margin and profit contribution
Let’s look at four simple examples of a website targeting ROAS and assume they make 50% margin on goods sold. Each column increases the budget by $1,000 and decreases the ROAS. To keep things simple let’s ignore lifetime customer value.
|
First Scenario |
Second Scenario |
Third Scenario |
Fourth Scenario |
|
|
Budget |
$1,000 |
$2,000 |
$3,000 |
$4,000 |
|
ROAS |
7:1 |
6:1 |
5:1 |
4:1 |
|
Revenue |
$7,000 |
$12,000 |
$15,000 |
$16,000 |
|
Margin |
$3,500 |
$6,000 |
$7,500 |
$8,000 |
|
Profit Contribution |
$2,500 |
$4,000 |
$4,500 |
$4,000 |
|
Acceptable |
Good |
Optimal |
Diminishing |
First Scenario: Acceptable.
This is where most advertisers feel most comfortable. Spend as little as possible and get the largest possible return. This is a very acceptable way to start and it is also understandable if you have capital restrictions. However, traffic, sales and revenue are often restricted by the higher ROAS target. In order to achieve a higher ROAS in digital advertising you need to bid lower than your competition and this will limit the size of the audience you are able to reach.
Second Scenario: Good.
This can be a leap of faith for some advertisers but when they do accept that increasing budget and relaxing the ROAS target leads to more revenue, margin and profit contribution from advertising, they are well on their way to growth.
Third Scenario: Optimal.
This is when your digital ads are running at their peak. You are spending more, getting less ROAS but higher returns, margins and profit contribution. I have chosen to ignore lifetime customer value in the table above but if you included lifetime value you would probably relax the ROAS and increase the budget a little more.
Fourth Scenario: Diminishing.
It is possible to get to the point of diminishing returns. You can absolutely overpay and get the same returns that you would have for less. This scenario is double the ad spend of scenario 2 with a reduced ROAS, leaving you with a lower profit contribution.
How do I measure campaign efficiency if its not ROAS?
Increase ad quality metrics to decrease CPC and increase ROAS
In summary, the goal of digital advertising is always revenue
- The goal is revenue
- ROAS is a KPI that shows you the effectiveness of your budget
- Higher budget with a lower ROAS can deliver more revenue
- Optimise ad relevance for campaign efficiency
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