Whether you're a full-time marketer or a business manager who wears several hats throughout the day, odds are you want to know how well your marketing efforts are performing. After all, if you don't know what's working (and what's not), then you'll never be able to make improvements to your strategy. It's like they say: "You can't improve what you can't measure."
Of course, there are a ton of marketing metrics out there that companies swear by. These include cost per thousand impressions (CPM), cost per conversion (CPC), and perhaps the most popular one, return on ad spend (ROAS). In fact, many marketers view ROAS as the lodestar for their analytics, and use it as their "bottom line metric."
The problem is, your ROAS may be misleading. It may make you think that you're doing better than you actually are; or it may trick you into thinking that your company's "ship" is about to sink, even when it's not! Let's talk about how ROAS works, why it's limited as a marketing metric, and how marketing efficiency ratio (MER) can provide a more accurate picture of your advertising efforts.
We could really "get into the weeds" with what ROAS is and how it works. For the sake of simplicity, here are the broad strokes on this metric:
ROAS has several limitations, but perhaps the single biggest one is this:
ROAS does not take into account all of the revenue that a marketing campaign may generate for the company.
For example, imagine that a customer sees a digital advertisement at the beginning of March. The ad sticks in the customer's mind for a couple of months. Then, in the middle of May, he or she finally decides to purchase the featured product from your company. In many cases, you wouldn't factor that purchase into your ROAS calculation. It came to fruition two and a half months later. However, it was still a direct result of your ad campaign in March.
Here's another example: Suppose that the primary objective of a marketing campaign is to increase brand awareness. Or to establish your company's credentials as a thought leader in your industry. Those aren't exactly goals that you can measure with simple arithmetic. Yet, they may be vital to your business's long-term growth. Again, ROAS won't be able to measure your campaign's performance with a lot of accuracy.
With that in mind, let's dig a little deeper into two important aspects of marketing that ROAS can't quite handle:
According to one definition, customer lifetime value represents "the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime." This isn't a metric that you can capture over a month or even a year. However, it's an important figure to know because your average CLV can serve as the benchmark for how much to spend on acquiring new customers (and keeping old ones).
For example, imagine that your ROAS is only a measly $0.50. In other words, for every dollar of advertising money you're spending, your customers are only buying $1.50 worth of product. For most businesses, that's no bueno.
What if those same customers come back to your business 30 times a year, without needing any more prompts from you? In that case, every dollar you invest in advertising is actually yielding a yearly return of $45! And throughout their lifetime, those customers would likely make your ROI even higher than that.
Obviously, you'd spend more money on acquiring a new customer with a high projected CLV, and less money on a customer with a low one. ROAS doesn't take CLV into account. What that means that your marketing efforts could be much more effective in the long run than you realize.
The "halo effect" refers to a customer's "favouritism toward a line of products due to positive experiences with other products" from the company. In other words, when a customer is pleased with a particular purchase from your business or enjoys a pleasant experience with your brand, they are more likely to buy other products from you, even if those products have nothing to do with their original purchase.
Once again, ROAS isn't able to account for the halo effect across different product categories. For example, imagine that a customer purchased a coffee-maker from an online company. Their shopping experience was easy, the shipping was fast, and the coffee-maker works great. Several months later, the customer buys a TV from the same company. That second purchase may not show up on any ROAS calculations, but it's directly correlated to the customer's positive experience. (And unless they bought a really expensive coffee-maker, their second purchase is far more valuable to the company than the first!)
A lot of executives love ROAS because it provides a snapshot of immediate returns from a specific marketing campaign. For instance, a lot of CFOs use return on ad spend as a key component of budget development. And, indeed, a high ROAS often means that the business' advertising strategy is performing well.
Of course, the downside of relying exclusively on ROAS to make key marketing decisions is that you may be missing the bigger picture. Marketing does more than generate profits in the short term. A solid marketing strategy should also build lasting value, and drive profits for months, perhaps years to come.
The key here is to remember that marketing expenses (including ad spend) should build your brand as an asset for the future. If an ad
then it may not matter if the customer buys from you today, or even several weeks from now. As long as the customer buys eventually, the ad has accomplished its purpose. That's why ROAS should only be one piece of the puzzle when it comes to measuring campaign performance.
Put simply, marketing efficiency ratio is total (not just immediate, but total) revenue divided by total ad spend from all marketing channels. MER allows you to take a step back, so to speak, and look at the cumulative effects of your marketing efforts over time. This metric also empowers you to make more strategic business decisions, and not to quickly react to "problems" with your marketing plan (like your ROAS dropping from $5 to $4.50).
MER can help you to see the interconnected value of all of your marketing assets. It measures how efficiently those assets, both individually and collectively, generate revenue for your brand. For instance, SEO-driven content provides a classic example of how assets can continue to deliver value long after the company's initial investment in them. It may cost some money upfront to develop a blog, and possibly hire a copywriter — but that blog may still be moving buyers through the sales funnel for years thereafter.
MER will become even more important as Facebook and Apple set up tracking restrictions for businesses, such as the removal of third-party cookies. These changes will make ROAS much more difficult to quantify than it already is since analysts will only be able to work with an incomplete data set. On the other hand, the marketing efficiency ratio's holistic approach to asset performance will help brands to determine the overall impact of their advertising tactics, despite any holes in the data.
The bottom line? ROAS is a useful metric, but it may result in a case of "missing the forest for the trees." In contrast, MER will give you a more complete, long-range view of your marketing efforts, and help you to make key strategic decisions for your company moving forward.
If some of the above information sounds like a foreign language to you, don't throw in the towel just yet! Our team of experts at ROI Swift can help you to accurately assess the effectiveness of your current marketing tactics, and optimize your strategy for long-term growth. We love making small and mid-sized businesses more profitable and helping them to reach their goals year after year. Reach out to us today via phone or email to start the conversation. We'd be happy to answer any questions you have!