We Need To Talk About ROAS
We dive deep into the issue of ROAS, the problems it presents, and alternative metrics you should be using to understand the true impact of your marketing and ROI.
Below are some key ideas discussed in the call, but you can also listen to the entire podcast with links found at the bottom of the page.
We’ve found - at least within lead gen - that people misunderstand the difference between intent and consent. It’s why a company may have a vast amount of data but without the intent for that data to translate into customers. I think what you’re talking about in relation to ad spend looks at a similar problem?
Kevin Bauer: Yes. It’s a very similar thing from a media perspective too because the wrong measurement has been driving people to accumulate - at least in this case - marketing impressions and thinking that that is a winning strategy. Right? “If I can increase share of voice, if I can just saturate the market, I’m going to win.” But as with intent, what you’re really doing is being very inefficient with the way you employ your marketing investment and overspending in a lot of areas and in a lot of cases really acquiring the wrong types of consumers that aren’t going to be good for your business in the long term. Yet, you have a metic in front of you that is convincing you that things are going good because you’re getting more marketing impressions and there’s a disconnect in there that needs to be solved.
You have stated that ROAS is Evil. What is the problem you have with using Return On Ad Spend?
I think this is something that really does need attention. What’s happening in the market right now, with all of the changes we’re all experiencing in the shifts to a cookie-less world and how do we deal with the changes to privacy and all of those things that we talk about, if we don’t change the underlying method in which we measure what we do and make decisions on what we do, we won’t really move forward. What we’ll end up with is an environment and an ecosystem that is built for one thing and a measurement system that is built for something else completely. It will be really, really hard to align and get value out of those new technologies and those new processes without that.
When I think about ROAS and the reason why I think it is evil - and I chose such a strong word, partly to get attention but I do believe it is evil - because if you really step back and go all the way back to the days when digital marketing was first sprouting, ROAS was essentially a metric which was invented to try to convince people to move from fixed marketing budgets to variable marketing budgets. That’s really the sole reason why it existed. People like me, I was on the sales side of things at that time. I needed people to spend more money and I couldn’t do that if they had a fixed budget, so all I had to do was could come up with a metric that sounded sexy and was vague enough that you couldn’t really pick it apart. At the time the whole industry, both the sellers and the buyers, didn’t understand what was happening well enough because it was so nascent, that we all kind of grabbed onto this metric and said “Yes, that makes sense.” But fast forward 25 years, we’ve never really put the metric under scrutiny and asked “Does it measure anything important? Does it fundamentally change the way that I am driving my business?”
And I don’t think that it does.
I think ROAS is really focused on the very top level of the funnel which is gross revenue, for most brands, and revenue is not a return. I think that is a fundamental disconnect and I think that that has trained generations of marketers to think about that in the wrong way.
The other thing that I believe it does, at a macro level, it forces us to look at the wrong denominator in a question. What that means is, we’ve grounded our measurement based on ad spend. What am I getting for this dollar? We’re measuring the wrong thing, and as spend isn’t the source of value in an organisation, it’s customers that create value for an organisation. So if we really want to understand how to make better decisions, the question isn’t “What am I getting for this advertising dollar?” The question is “How many dollars did I spend to acquire the right type of customer? How many customers did I acquire? What is the life time value of the customers I acquired?” Those are the salients metrics that will drive success for a brand.
How do you think the demise of the third-party ecosystem will impact the use of ROAS?
I think we’re at a really critical point because ROAS was the driver and the creator for all of that demand for third-party cookies. My position is it created the demand that got us where we are today.
So when we say “Hey, we’re dismantling that system now,” which of course I am a huge fan of, I think it’s absolutely the right thing for us to do and there’s a lot of opportunities out of that, but as we’re dismantling that system we have to change the way we are measuring as well.