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The Limitations of ROAS – Don’t Let a Vanity Metric Hijack Your Growth

Looking Past Return on Ad Spend to Optimize Your Digital Marketing Campaigns for Long-Term Success and Profitability

  • May 24, 2024
  • /
  • Chuck Kessler
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ROAS (Return on Advertising Spend) is a commonly used metric in digital marketing. Unfortunately, it also has several fatal limitations that can lead marketers down a potentially expensive path. 

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These limitations include its failure to account for the full customer journey, its focus on short-term gains, its potential to misrepresent profitability, and its inability to measure the effectiveness of branding and awareness campaigns.

This post takes a closer look at the limitations and risks posed by an obsession with ROAS. Then, it details a more holistic approach to highly effective marketing, and charts a successful path forward for ecommerce entrepreneurs willing to look past vanity metrics. 

Why Does ROAS Matter? 

ROAS, or “Return on Ad Spend” is a marketing metric used to measure the effectiveness of an advertising campaign. ROAS is calculated by dividing the revenue generated from an advertising campaign by the cost of that campaign. 

For example, if a company spends $1,000 on an advertising campaign and generates $5,000 in revenue as a direct result of that campaign, the ROAS would be 5 (5,000 / 1,000 = 5). This means that for every dollar spent on the advertising campaign, the company earned $5 in revenue. 

ROAS has traditionally functioned as a key metric for marketers as it helps them evaluate the profitability and efficiency of their advertising efforts, allowing them to optimize their campaigns for better returns.

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Prioritizing ROAS Can Be Counterproductive

While Return on Ad Spend (ROAS) is widely used in digital marketing, committing an unhealthy amount time and research on this metric can lead to several pitfalls that undermine a brand’s long-term success. 

By prioritizing short-term gains and efficiency over a more comprehensive, balanced approach to marketing, businesses risk limiting their growth potential, stifling creativity, and damaging valuable customer relationships. 

In this section, we’ll explore the limitations and risks associated with an over-reliance on ROAS as the primary marketing metric, highlighting the importance of adopting a holistic strategy that considers both immediate results and long-term brand health.

Short-Term Focus

Overly Narrow Targeting

Efficiency Over Effectiveness

Stalling Creativity

Budget Micromanagement

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A More Holistic Approach

To build lasting success, brands should adopt a more comprehensive view of marketing performance that balances ROAS with other crucial metrics including:

Share of Search

Share of Search measures a brand’s visibility and mind share within its target market. It indicates how often a brand is searched for relative to its competitors, providing insights into brand awareness and the potential for future growth. 

By analyzing Share of Search, marketers can gauge the effectiveness of their brand-building efforts and identify opportunities to increase market presence. This metric is particularly useful for tracking the impact of marketing campaigns over time and understanding how well the brand resonates with its target audience compared to competitors.

Contribution Margin

Contribution Margin considers the profitability and efficiency of marketing efforts in driving business results, rather than just looking at sales figures. This metric subtracts variable costs from revenue to determine how much money is available to cover fixed costs and generate profit. 

By focusing on Contribution Margin, marketers can evaluate the true financial impact of their campaigns and make more informed decisions about where to allocate resources. This approach encourages strategies that not only boost sales but also enhance overall profitability.

New Customer Acquisition Cost

Analyzing the cost and efficiency of acquiring new customers is essential for long-term growth and market expansion. New Customer Acquisition Cost (CAC) measures the expense incurred to attract and convert new customers, providing insights into the effectiveness of marketing strategies. 

By optimizing CAC, brands can ensure that their customer acquisition efforts are cost-effective and scalable. This metric is crucial for evaluating the return on investment of various marketing channels and tactics, helping brands to balance immediate sales with sustainable growth.

Customer Lifetime Value

Customer Lifetime Value (CLV) focuses on the total value a customer brings to a brand over their lifetime. This metric encourages strategies that prioritize long-term customer relationships by considering the recurring revenue a customer generates through repeat purchases and loyalty. 

By understanding CLV, brands can tailor their marketing efforts to enhance customer retention, satisfaction, and loyalty. Investing in long-term customer relationships not only increases CLV but also reduces churn rates and improves overall business stability.

Brand Awareness

Measuring how well a brand is recognized and recalled by its target audience is crucial for understanding the long-term impact of marketing efforts. Brand Awareness metrics track the extent to which consumers are familiar with and can identify a brand. High brand awareness often correlates with greater customer trust and preference, leading to increased market share and customer loyalty. 

By monitoring brand awareness, marketers can assess the effectiveness of their brand-building activities and identify areas where additional efforts are needed to enhance visibility and recognition.

How Canopy Management Can Help

A holistic approach that balances ROAS with these other key metrics helps brands develop more sustainable, effective marketing strategies. This means investing in creative campaigns that capture attention, drive brand awareness, and attract new customers, even if they don’t always yield the highest immediate ROAS.

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