29/11/2023
ROAS Is lying and hurting your profit 📊
When measuring the success of advertising campaigns, ROAS (Return on Ad Spend) is often considered a key metric. But is it really the best way to assess performance?
I used the products of Daily Paper in this example to showcase that ROAS is is not helping you making good decisions in your ad account.
Here's why it is hurting your profits.
✅ 1. Overly Simplistic: ROAS measures immediate revenue generated against the ad spend. While it's easy to calculate, it overlooks critical long-term factors like life time value.
✅ 2. Ignores Customer Segmentation: Not all customers are generating equal profit. In my example, I segment on gender. In this case, women spend more in a 60-day LTV frame than men. ROAS metric fails to capture these nuances.
✅ 3. Detached from Profitability: ROAS doesn’t take into account product margins, fulfillment costs, or other operational expenses. A high ROAS doesn't necessarily translate to higher profits.
✅ 4. Misaligned with Business Goals: Focusing solely on ROAS can lead to short-term decision-making, potentially sacrificing long-term growth and customer relationships.
🎯 Example: Women vs. Men in 60-Day LTV Frame
In our recent analysis, we discovered that women exhibited higher spending patterns within a 60-day LTV frame than men. Relying solely on ROAS would have missed this crucial insight, potentially leading to suboptimal marketing strategies.
🚀 Conclusion:
While ROAS can provide a snapshot of campaign performance, it falls short in delivering a comprehensive understanding of customer behavior and long-term value. I have seen many E-commerce businesses with widely different outcomes in profit per segment.
Look beyond ROAS and incorporate more sophisticated metrics such as contribution margin 3 to increase your pre-tax profit.
