Today’s topic is about a popular metric in the advertising world, Return on Ad Spend (ROAS), which aims to simplify the consequences of advertising strategies.
“How many dollars do you earn back if you spend $1 on ads?”
Though straightforward, the metric used to answer this question has its bugs.
1- Misattribution of Success:
ROAS might credit your Google ads for purchases that actually derived from other methods, like word-of-mouth. Imagine a scenario where a satisfied customer recommends your service, encouraging their friend to search for and find your product online. In such scenarios, the ROAS calculation will misleadingly assign this success to your Google ads campaign.
2- Misleading Profit Indications:
A common misconception is that a higher ROAS automatically means more profit. For instance, a ROAS of 6x might seem more efficient than a ROAS of 5x. However, earning a 6x return on a $10 spend doesn’t actually translate to more money than a 5x return on $10,000,000! (+)
3- Lack of Standard Benchmarks:
ROAS varies significantly across different contexts, making it difficult to define what a “good” ROAS is. In competitive industries or new markets, the achievable ROAS might be lower due to the high acquisition costs or the need for customers to familiarize themselves with your product.
OK, that’s enough for today!
In summary, this exploration of ROAS highlighted some of its limitations. I plan to write a follow-up post discussing metrics that could provide a clearer and more comprehensive evaluation of advertising strategies.
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