Our agency no longer lives or dies by Returns On Ad Spend(ROAS) as our only measure for success. From our experience, we have seen that when we are too focused on measuring ROAS we tend to overlook far more important numbers. In this ‘Masterclass’ discussion, we will uncover some of the things we have learned in the past focusing way too much on ROAS and introduce you to a new perspective on how you can view ROAS and your brand’s success.
If you missed our previous Masterclass discussion, click here.
A man walks into a bar, proposes to the first girl he sees, she says yes and they get married and live happily ever after. Marriage at First Sight might make for great reality TV but it makes for a terrible advertising campaign for your customers.
If all of your ads revolved solely around getting people to buy right now, then you’re putting all your eggs into the one small basket of people who are happy to marry you at first sight. And you’re ignoring all of the green fields of potentially higher quality leads who would be happy to buy from your brand if only they had a bit more time to get to know you better. I’m Adam Sugihto & this is Intentional Advertising.
Is ROAS keeping your Brand small?
If we’re talking about advertising that gets customers to buy right now – then we’re pretty much talking about high Return on Ad Spend or high ROAS advertising. We need ROAS. We need to know that money we’re investing in advertising is translating into Sales and a high ROAS means we’re getting a lot of bang for our buck. What could be wrong with that?
For the first 5 years of our agency, we ran on ROAS. ROAS was the number that we reported to clients and was a number that internally we lived and died by. If ROAS was up – it was a great month and a party for all and if ROAS was down – it was like a punch in the guts and we’d want to crawl into a hole.
ROAS is important and has its place and we still use it but we no longer live or die by it. As recovering ROAS addicts, we’ve seen that an unhealthy fixation on ROAS actually distracts us and our clients from some other far more important numbers. Essentially, a case of missing the forest for the trees.
If that sounds familiar, you too may be a ROAS addict, and if that’s the case here are 3 things that we might just throw your way to see if clinging too tightly to ROAS is maybe preventing you from seeing the bigger picture.
ROAS throttles Reach
As you probably already know, high ROAS segments are found right at the bottom of the marketing funnel or close to the buying decision. In digital we’re talking mainly about Branded Search, Remarketing, and sometimes Unbranded Search. These are people who already know you, are ready to buy and practically you just need to make sure that you don’t do anything to get in the way of the sale. This kind of high ROAS campaign or high ROAS advertising is a staple of all digital advertising – and you should definitely make the most of this low hanging fruit.
The problem is though that not all of our segments that we’re targeting are at the bottom of the funnel. As we target further away from the buying decision (or further up the marketing funnel), ROAS is naturally going to fall away.
The closer to the bottom of the funnel we’re targeting or the closer to a buying decision the higher the ROAS.
The further away from a buying decision or the further up the marketing funnel, the lower the ROAS.
Measuring upper funnel segments to the same ROAS yardstick as lower funnel segments then cutting them off when they don’t perform is like being disappointed when someone doesn’t marry you at first sight. We just really shouldn’t be holding both of these very different segments to the same expectation.
So the natural consequence of accepting only high ROAS advertising is that you’re choking your ToF and MoF, essentially throttling the reach of your brand and the exposure that you have amongst your target market. If this is the case, then there are probably blue oceans of customers who would be very interested to buy what it is that you have if only knew you existed and were just allowed a little more time to know you better.
In one of the great showdowns of Advertising, two of the leading but opposing voices Mark Ritson and Byron Sharp recently held a one on one debate in front of a room full of 5,000 advertisers who would then vote on the outcome of the night. In the blue corner, Mark Ritson argued for tight positioning, segmenting, targeting, essentially for high performance and high ROAS. In the red corner, Byron Sharp argued for Brand Building & Mass Reach.
So who won on the night?: Mark or Byron? Performance or Brand Building? ROAS or Reach? Mark won on the night, but a year later he personally conceded his crown over to Byron thanks to a UK IPA advertising effectiveness study that was based on 30 years of data, over 700 brands in over 80 categories.
You’ll be pleased to know though that common sense prevailed from the study and that neither ROAS or Reach is the right answer.
And that this isn’t a case of ‘either-or’ but it’s a case of ‘Both And’.
Brands need ROAS for short-term sales, short term activations but this can’t come at the expense of longer-term brand building.
So the fact that advertisers need both Performance and Brand Building wasn’t really that much of a surprise. The real surprise of the IPA study was that the data showed that there was an ideal advertising ratio between performance and brand building, between ROAS and Mass Reach.
Before I share the ideal ratio between performance and brand building in any advertising spend – what do you think the number should be? What’s the number you have in your head? Let me give you a few seconds to think about it. What do you think is the ideal ratio in any given advertising spend between performance and ROAS based campaigns versus longer-term brand-building campaigns. I’ll give you a few seconds to think about it.
OK ready? Do you have a number in your head?
Well it turns out from the study that the ideal proportion of ad spend for both effective and efficient brands over the long term is that…
40% of your ad spend should be going towards ROAS & Short Term Performance
60% of your ad spend should be going towards longer-term Brand Building
You might balk at that ratio and of course, the numbers are going to be slightly different for every brand and the purpose of this video isn’t to say immediately go now and change your marketing mix but the takeaway here is that you’re only accepting high ROAS campaigns then your Brand is not being set up for the long term.
Is ROAS leaving money on the table?
It’s important to remember that ROAS is just one number, it’s an important number but it’s just one number and the thing is it’s not even a hard number in and of itself. ROAS is a derived number or a derivative.
The two numbers that ROAS is derived from is Revenue and Ad Spend. When you divide one by the other you get a percentage. And as the saying goes, you can’t eat a percentage but you can eat revenue. So it’s possible to have a lower ROAS yet drive more Revenue.
It’s important to remember that ROAS might be a great signpost – it might let you know how well or how efficiently your revenue is being earned but ultimately your goal is not ROAS, your goal is revenue.
Of course, we’re not talking about accepting lower ROAS because your agency is lazy and we’re not saying lower your ROAS into unprofitability for your brand so clearly you need to guard against those things. But let’s run a hypothetical example, and say that you are running a few campaigns that you are happy with. Let’s say you’re targeting a 5x ROAS and let’s say you are happy with the profitability, you’re happy with the revenue but you just can’t seem to find enough buyers at 5x. You’ll likely find that if you introduced some MoF campaigns that can warm up a much larger pool of audiences and if you relaxed your ROAS requirement from say 5x to maybe 4x or 3 and a half x, that even though you have a lower ROAS – you might actually find that you’re driving more revenue.
So the takeaway here is: Assuming you’ve done all that you can on your bottom of the funnel, if all you’re doing is accepting high ROAS, you’re more than likely leaving some good money on the table.
In this video, we’ve learned that an unhealthy fixation on high ROAS campaigns:
Throttles Reach reducing your Brand’s exposure to your target market
Causes you to play the short term game at the expense of long term Brand Building
For the sake of reporting on a high percentage ROAS figure, means more than likely you’re leaving some good revenue on the table
So what now? What can we do with this kind of information? If you have a Search account, Google now includes a Performance Planner where you can see what would happen if you were to tighten or loosen your conversion requirements, essentially adjust your ROAS expectations up or down. Here you can find out the relationship between ROAS & Revenue and you can find out where your brand actually sits on that spectrum – so why don’t you go into your account today, have a look and see if you are leaving some good revenue because you’ve been too demanding on ROAS.
There is no equivalent of the Performance Planner tool for Display based advertising like YouTube, Facebook, and Instagram. For these kinds of display channels, you’re going to need to use a different set of tools. Tools like the search list study, or the sales list study that is not available in the interface itself but is available through the Google Premier Partner’s program and the Facebook Marketing Partner’s program. If you’d like some help with that, feel free to contact me and the team; we got a link in the description below and we can give you a hand with that.
As a footnote, if you’re looking for a deeper dive into the advertising ratios of Performance vs Brand Building, I’d highly recommend watching the Mark Ritson vs Byron Sharp debate followup on YouTube 1 year later. In that YouTube video, he outlines the IPA Effectiveness & Efficiency Study and takes a lot of data from it called “The long and the short of it”. I’ll include a link to both the YouTube and the study in the show notes below, definitely check it out.
If you think you can handle some more of our value packed Masterclass discussions, check out our next one about Marketing Funnel Mistakes. In this discussion you will learn all about the mistakes that we have faced and how to exactly overcome them.