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ROAS (Return on Ad Spend) has been the go-to metric for marketers looking to prove the value of their efforts. But while these metrics can provide valuable insights into campaign performance, they don't tell the full story of how your marketing efforts are contributing to your business's deeper purpose and mission.
As John Moran, Head of Traffic Strategy at Tier 11, explains:
ROAS has been the benchmark for the majority of agencies, business owners, independent marketers, and freelancers. The bad part is that it does not take into consideration the difference between new and existing customers, omnichannel traffic overlap, and things like organic traffic and email traffic that may be taking credit for or not taking credit for the good work or bad work that your paid media traffic campaigns are producing.
One of the primary issues with relying solely on ROAS is that it fails to differentiate between new and existing customers. Acquiring new customers often requires more resources and effort than retaining existing ones. You may make decisions based on an incomplete picture of your marketing performance by not distinguishing between these two groups.
Customers interact with brands across multiple channels and devices. Relying on in-app (Meta, Google, and other ad platforms) ROAS metrics can lead to attribution issues, as they do not accurately account for the impact of various touchpoints throughout the customer journey. John Moran emphasizes this point:
As we enter into the age of the loss of third-party cookies and the loss of data attribution, especially if the sales cycle or time lag is too long, we're picking up more on the closer to the purchase event but further away from where the interest was gathered. All of the ways that we are currently measuring as an industry are wrong, and we are essentially lying to clients or our boss if we're working inside a business in a marketing position.
To illustrate the limitations of relying on ROAS, John Moran presents a case study comparing YouTube and Performance Max campaigns for a company selling a $40 product.
In the case study, Google Performance Max campaigns showed a 631% increase in ROAS, while YouTube campaigns only saw a 22% increase. At first glance, it may seem that Performance Max is the clear winner. However, John Moran cautions against this interpretation:
Performance Max will take credit for the top-of-funnel and new customer awareness and try to interject itself in the path that is going to be closer to the buying journey so that Google tricks you with a really healthy ROAS. You start dumping in more and more money into it. Google is a publicly-traded, for-profit business; they want more money, and because they know that typically marketers measure ROAS, they are going to lean into that.
Despite YouTube's seemingly poor ROAS performance, it was crucial in driving top-of-funnel awareness and engagement. John Moran explains:
YouTube has horrible attribution. People don't click on TV commercials, and that's pretty much what YouTube is. It's a TV commercial, for lack of a better sense. That's how people engage with that.
To gauge YouTube's effectiveness, John suggests looking at the number of clicks as an indicator of audience engagement and measuring it by Media Efficiency Ratio (MER).
One key takeaway from John Moran's video is the importance of using marketing platforms as marketing engines rather than measurement tools. By focusing on the wrong metrics, such as in-app ROAS, marketers can be misled into making poor decisions.
When we're in our marketing platforms, we want to use our marketing platforms as a marketing platform. We do not want to use our marketing platforms as a measurement platform. We will be consistently chasing our tail by taking these metrics that the in-app platform gives us at face value.
To gain a more comprehensive understanding of your marketing performance, it's essential to look beyond ROAS and consider additional metrics such as:
Media Efficiency Ratio takes into account all cash in and all cash out, providing a more accurate picture of your marketing performance. In the case study presented by John Moran, the YouTube campaign showed a 585% increase in cost and a 655% increase in revenue, indicating a positive MER despite the low ROAS.
Monitoring your New Customer Acquisition Cost helps you understand the resources required to acquire new customers. By tracking this metric, you can make informed decisions about your marketing investments and ensure that you're acquiring customers at a sustainable cost.
Differentiating between new and existing customers is crucial for assessing the effectiveness of your acquisition strategies. By tracking your New Customer Acquisition Rate, you can identify which channels and campaigns are most successful at attracting new customers to your business.
Lifetime Value represents the total amount of revenue a customer is expected to generate throughout their relationship with your brand. By understanding your customers' LTV, you can make strategic decisions about customer acquisition and retention efforts.
To make effective decisions, it's essential to align your metrics with your overall business objectives. John Moran emphasizes the importance of measuring the right metrics:
If you're measuring in-app or you're measuring ROAS, you're not actually measuring because you're using the marketing engine as a measurement tool.
By focusing on metrics that accurately reflect your business goals, you can make strategic decisions that drive long-term growth and profitability.
Data-driven insights are key to optimizing your marketing strategies and maximizing your return on investment. By analyzing the CORRECT performance data, you can identify areas for improvement and make informed decisions about resource allocation.
John Moran highlights the importance of trusting your data and using it to guide your marketing efforts:
In this scenario, we're using the marketing engine as a marketing engine because we know that a good message to a good audience at scale, while it holds, will deliver profitable results regardless of what Google tells us.
Relying solely on ROAS as a performance metric can lead to misguided decisions and suboptimal marketing strategies. By embracing a more holistic approach to performance measurement, considering metrics such as Media Efficiency Ratio, New Customer Acquisition Cost, New Customer Acquisition Rate, and Lifetime Value, you can gain a more accurate understanding of your marketing effectiveness.
As John Moran emphasizes, using marketing platforms as marketing engines rather than measurement tools is crucial for making informed decisions and driving long-term business growth. By aligning your metrics with your business objectives and leveraging data-driven insights, you can optimize your marketing strategies, adapt to market trends, and drive profitable growth.