Return on Advertising Spend. What a nice, warming number! I made 5.5 times what I spent on advertising! That’s great right? Well… maybe.
ROAS is based on top line revenue, it is not ROI. ROI is based on your margin which takes all elements of what you invested as well as all expenses. Advertising is just one expense involved in the sale of a product.
That’s why I consider ROAS a vanity metric. It is comparing one expense (advertising) against the subtotal of a purchase following an interaction with your ad. The ad most definitely played a role in the sale of the product! I’m not disputing that. I’m suggesting that ROAS sort of hides individual product performance because it looks at the sub-total of the purchase for revenue and it doesn’t take margin into consideration so it creates a warm and fuzzy feeling without providing real insight.
Here’s a for instance. When I advertise a product on Facebook, I’m looking to see a direct corelation between the money spent and the sales generated for that product. That’s ROAS right? Nope. ROAS uses revenue based on the subtotal of order and it doesn’t matter if the user purchases the product advertised. They could come to the site and purchase something completely unrelated to the advertising so that gets included in ROAS. Still a win right? Well… now you don’t know if your product was successful. It looks like it was because you have purchases associated to your campaign, but not necessarily the product you were advertising. If you knew, you’d be able to make adjustments!
Then there is the pixel in general. If a user interacts with your ad, even just to like or add a smiley, now they are “pixeled”. Depending on your settings, they could come back to your site in reaction to a social post or some other marketing activity. If they make a purchase after they’ve been pixeled, it is tracked as ROAS in your ads.
I consider ROAS a vanity metric because it’s pooling revenue from any source, not just the ads (as long as the user was pixeled as part of the ad campaign, they’re fair game), and it doesn’t take margin into account. So let’s say you’re selling a product that retails for $50 with a 20% margin and you spend $100 in advertising. You sell 10 so you sold $550 in product. That’s an ROAS of 5.5 – great right? Let’s remember your margin is 20% on that product. $55 * 20% = $11 margin on each sale. 10 sales = $110 in margin. Hmmmm, and this doesn’t include the cost of the product! shipping, customer support, packaging – hell it doesn’t even pay for the coffee in the breakroom!
Adding more mud to the ROAS picture, different products have different margins and ROAS doesn’t care what product is purchased, just the revenue.
Suddenly that 5.5 ROAS is a sinking ship. At least we feel good about it right?