Why Has Opinion Shifted On ROAS?
If you look through our blog articles you will see a lot of content related to ROAS (Return On Ad Spend) and some on ROI (Return On Investment). The reason opinion is changing around these regularly used metrics is that society and the way business operates is also changing... at a rapid pace. Pear Digital aim to bring you the most current information, and so on occasion, this may mean going back over previous articles to make corrections.
But here's the thing. It appears that one major event has been the catalyst behind digital marketing and companies rethinking their use of the ROAS metric; iOS14.
Shining a light on ways of working
In 2020 Apple updated their iOS to version 14, of course updates are a regular feature of any operating system. However, in a maverick move (largely aimed at getting customers back on-side and creating a 'transparent' approach to marketing) Apple gave users the option to opt out of data collected by third parties. This came at a time when people had already been in lockdown, they had the chance to read up on what data collection actually was, and so almost everyone chose not to give their data to third party applications. In fact, according to commonthredco.com 96% of users chose the new course of action.
For over a decade it was taken for granted that operating systems across various brands would automatically opt-in customers to have their information handed on to third parties. It was almost a joke among consumers that if you purchased a phone or tablet you were just opening the floodgates for targetted ads, and people knowing your details such as age, gender, ethnicity and general location. Apple's clever move not only gave them an edge when it came to being a more friendly face in the market place, a more honest choice, it also shone a light on how the marketing industry was currently operating.
With Facebook ROAS diminishing by approximately 30% across a short period of time, it was clear that something needed to be done. Using ROAS as one of the main metrics is now in a state of flux, marketing executives are suggesting removing the section from reports, and investment into advertising will be handled in a new way moving forward. Over our next few blogs we will explain these changes in more detail.
What does 'traditional' ROAS look like?
The digital retail landscape is the easiest way to display an example of 'traditional' ROAS. When looking for a decent return on your ad spend, most companies set up their system so that retail sales teams have a Trade Budget which is used for advertising, promotions and discounts aimed at accruing more sales and more repeat customers. This is approximately 15-20% of every £1 that is sold through the business. For some companies there may also be an added fee for the 'cost of doing business' that comes before the Trade Budget is taken into account.
If you are a new brand starting out you will expect to put more into your advertising, therefore your percentage of every £1 spent will need to be higher. This usually lasts for around 2 years, or until you have a regular/ growing customer base and you have worked out your primary drivers. This in turn means that established brands, or businesses that are organically growing, can reduce their % of each £1 spent.
The simple calculation of revenue divided by ad spend/cost is something that everyone is now familiar with. This information is used by an algorithm to create benchmarks for your business to follow, and it is designed to 'help' you decide on future marketing plans... the only issue is that now this method has come under a lot of scrutiny, many flaws have been found.
From the horse's mouth
As with everything online, you may be wondering "how can I trust this information?" which is a fair point, considering that many marketing companies were promoting ROAS as a main metric even as recently as Summer '22! We have taken expert sources from the web and found relevant quotes from the people that matter.
Writing in August 2021 Cristy Garcia (a Forbes Communication Councils Member and Vice President of Marketing at Impact), stated: "Ditch the return on ad spend metric... Brands will apply traditional ROAS to a commerce content program and then balk when it appears to underperform... There has to be an investment in multi-touch attribution and a willingness to fairly compensate [publishers] to reward the heavy lifting that goes into [publishing good content]..."
For 'publishers' you can insert any business type, and for 'publishing good content' you can think of this as any advertising content that is being provided by an online business. The fact is, the framework of using ROAS calculations that were designed five or more years ago, simply won't work in 2022.
"The metric does not take into account any organic conversions. These are conversions that would have happened regardless of the money you spent on that channel. We have been wired to think that inputs and outputs are directly related, and this metric sometimes assumes causality when none is there. That is why this metric is so faulty." - Tracey Daniel, Traffic & Conversions Summit, 2021-22
Not only do we have the issue of the metric not picking up naturally occurring conversions, using an algorithm means that you are at it's mercy. "When your primary KPI is ROAS and you are using algorithm trading (as all online marketers are) the machines learn to optimize by that – and that metric only. When this occurs, and ROAS is the only outcome that you are bidding toward, it creates a ceiling on your ad spend, limiting potential, instead of acting as a floor from which you can generate growth." - Kathleen Booth, SVP of marketing, Tradeswell.
What are the alternatives?
As part of our series of blogs we are going to give you a detailed insight into the flaws that have begun to surface since 2020, and of course, we will provide solutions and suggestions to help you navigate the changes taking place! Make sure you check back with us for the next instalment.
If you have any questions, queries or would like to partner with Pear Digital, please don't hesitate to contact us.