Tom Roach wrote an article for MarketingWeek titled Beware ROAS, ROI’s Dangerous Digital Twin (October 12, 2022).
« Too great a focus on return on ad spend (ROAS) is leading to short-term thinking and under-investment, which in turn is stifling growth, and it has the potential to be far more damaging than ROI. »
« ROI’s issues in brief. ROI tends to inversely correlate with profit growth, as due to diminishing returns ROI decreases as you spend more, and increases as you spend less. So the easiest way to increase your ROI is to decrease your media spend. Focusing on increasing ROI would therefore limit growth or even “send you broke” as Byron Sharp says.
Instead you should prioritise the incremental profit or revenue you achieve. ROI is not actually a measure of effectiveness but how efficiently you achieved it. So don’t use ROI as a target, use it to help you check the value for money you’re getting for your media investments. »
« So what is ROAS? ROAS is in very common use by many digital marketers as a buying objective in the real-time optimisation of performance activity across a range of platforms and channels.
The ‘return’ means the sales that occur during a specific time period when your advertising was served by the adtech. If someone is served an ad and if they purchase within a set time frame, those sales are attributed to the activity. »
« Given its very common use as a target set by finance teams and as a buying objective in digital media, ROAS is likely to be leading to a real-time, real world version of the theoretical problems with ROI: short-termism, under-investment, de-prioritising longer-lasting activity and stifling growth. »
« Ex-Adidas marketer Simon Peel says: “ROAS is a misnomer. It should be called ‘credit for ad spend’.” »
« ROAS can take credit for other channels’ earlier work. ROAS can foster a sense that channels ‘compete’ rather than work together. Imagine a football manager believing their centre forward is entirely responsible for every goal so ditching their defence and midfield for 10 centre forwards. ROAS is only measuring what happens in the final third of the pitch. As Peel says: “It is a fraction taking credit for the whole.” »
« Chasing ROAS chases easy sales, not growth. The closer an audience is to the buying decision, the higher the ROAS will likely be. These are people who already know you and are ready to buy. And you can’t rely only on them for your growth, you need to fill your funnel with people who are further away from purchase, so will naturally deliver a lower ROAS. You need a more balanced plan, rather than expecting all activity to have a high ROAS and switching off anything that doesn’t. »
« Chasing ROAS can mean targeting people who would buy you anyway… like hanging outside a shop and tapping shoppers on the back as they enter then claiming you’ve enticed them in. »
« ROAS may inversely correlate with growth. Brand growth comes disproportionately from light buyers, but focusing on high ROAS can lead to you targeting more and more heavy buyers, so limiting growth. It can make brands inward-looking and too focused on existing customers, rather than on reaching new customers. »
« Here are just a few real world examples I’ve seen that illustrate some of this:
- A famous sportswear brand testing some well-known remarketing technology wasted millions of adspend, because while the tech claimed £4 ROAS, only 1-2% of the sales were found to be incremental.
- A well-known online fashion retailer that’s been targeting a total ROAS across all media for five years has seen its share of search and share of market decline ever since.
- A respected B2B financial services brand shifted budget to search, its most efficient channel, and subsequently saw net customer acquisition, revenue and market share decline year on year.
- A sports brand heavily increased ROAS-optimised digital spend and saw share of search decrease and price sensitivity increase year on year.
- A jewellery brand consolidated spend solely into commercial periods when they saw high ROAS, and saw brand associations with key category entry points decline over time. »
« ROAS is part of a skewed view of how advertising works… Advertising mostly influences people’s behaviour by building and reinforcing brand memories before they’re in the market, and when they fall into the market, it can refresh those memories to help the brand be a little more likely to come to mind and be chosen. So rather than driving awareness, consideration and conversion, digital advertising is really part of a rich tapestry of thousands of little touches (including all sorts of stuff that isn’t ‘advertising’ or ‘digital’) that combine together to gently contribute to maintaining or increasing sales.
Ads on a given platform do not exist in a vacuum – with their own distinct ROAS number that can be calculated within that platform alone. »