An interesting debate broke out today regarding ROAS as a metric and it’s usefulness. My argument was that return on advertising spend is really only useful when looking at net revenue, because a target value of 100% ROAS rarely suits most products and services advertised online. The flip-side of the argument is that calculating true ROAS can be terribly difficult, therefore it’s more valuable to use ROAS as a relative measure of success over time. Both arguments are valid, so understanding both sides of the argument is important.
How many Intangibles Effect Revenue?
Many reasons why several of my clients do not like to calculate the true ROAS for their pay-per-click advertising campaigns is because of all the other intangible benefits one simple online order or conversion can have on their business success. Some of the more common intangible benefits include:
- Lifetime customer worth: what are the chances your customers make repeat purchases?
- Referrals: do your customers refer your business via worth-of-mouth?
- Renewals: your customers already know who you are, so they’re not searching anymore. Do you offer different products or services that maintain your business relationship and revenue stream.
- Relationships: how many of your customers can offer you products or services that will significantly effect your bottom line? How many other potential customers can offer you additional cost reductions?
Most of these questions are extremely hard to answer and quantify for online marketers. Those that have enough historical data to work with can give you a best-guess for the most significant factors affecting true ROAS. Some clients just have to understand that calculating true ROAS is often above and beyond the scope of a contracted search marketer’s job (unless money is no object).
Barriers to Calculating “True” ROAS
Now that we’ve addressed intangible benefits of customer acquisition through online search, we can examine some of the quantitative or “tangible” barriers to calculating an accurate return on advertising spend.
- Highly varied income/revenue: especially prevalent in the services industry where one size does not fit all. It’s all fine and good if you’re selling one product to everyone all the time, but calculating true ROAS (or ROI for that matter) can be a heavy burden for some.
- Considerably long sales cycle: how long does your average tracking cookie last? I’d hazard a guess that if you have to wait any longer than 4-5 days, you might as well give up on reliable tracking numbers for your search campaigns. If there are multiple decision-makers involved, the likelihood that they all use the same browser is nil.
- Poor analytics tools: having the data required to truly know how much traffic is pushed to your site and converts is critical in determining the success or failure of any online campaign, whether it be search related, or a call to action in print. When possible, try to pull all the data you can into “one unified version of the truth.”
- Confidentiality: even for marketers within their own organizations it’s difficult to determine the true costs of products and services in an increased effort to protect company interests, so the contracted search engine marketer has their work cut out for them.
- Technical difficulties: if your search marketing analytics tool “loses” data for any given amount of time, or fails to track your traffic accurately, you will likely notice one horrible-looking week almost always followed by a stellar-looking week.
One Size Fits All
Many marketers, especially in small business, opt to measure ROAS as a relative indicator of success. In high-level meetings it’s easy to explain that 100% ROAS means that the spend going into a campaign is equally balanced with the revenue coming out of a campaign. This is a classic one-size-fits-all application of the ROAS metric, however it does not accurately reflect the true profitability of a campaign. To calculate your true ROAS, you need to increase granularity and take into account individual products and services you offer, your profitability, and attempt to quantify your intangible benefits.