We’re constantly seeing ads from “marketing experts” and “advertising consultants” about how they can create ad campaigns with 10x+ or 20x+ ROAS (return on ad spend). While that may sound great, it’s not always a good thing.
The reality is that creating a campaign with a high ROAS is not difficult. Instead, the hard part is maintaining an optimal ROAS that maximizes revenue.
Understanding ROAS as a KPI
ROAS is defined as the revenue generated from your advertising spend. It’s a great indicator of how well your advertising is performing, but it only tells half the story.
However, ROAS alone only shows how efficient your ad spend is. It does not convey if the media campaigns are leading to increased overall revenue.
To better understand why this is the case you have to better understand advertising’s role in the customer journey.
ROAS by stage in the customer journey
The customer journey is the path a prospect goes through before and after becoming a customer. At a high level, it’s broken out into four phases: Awareness, Consideration, Purchase, Loyalty.
Awareness is when the prospect is first introduced to the brand. This can happen through advertising, but also from PR, partnerships, or even word of mouth. Most prospects don’t purchase at the awareness stage, because they’re not actively looking to purchase yet.
Consideration is when the prospect is considering the brand and evaluating it against competitors. At this point the prospect intends to purchase a product, but is researching the exact product and brand.
The purchase stage is when the conversion is most likely to occur. The prospect has high intent to purchase and included the brand in their final selection. It’s imperative that a brand stay top of mind at this stage, to ensure the prospect completes the purchase.
Once a prospect purchases, they enter the loyalty stage. It’s at this stage that the brand attempts to cultivate a long-term relationship with the customer. The brand will continually engage with the customer to encourage repeat purchases.
As you can see each stage of the journey the prospect intent changes and with it the likely ROAS of that audience.
If we only invest in targeting prospects in the Purchase stage, then our campaign will have an extremely high ROAS, but we won’t be introducing the brand to new consumers. That means that our campaigns won’t scale, since it’s tied to only the consumers that are very familiar with the brand.
However, if you only invest in brand awareness, the campaigns will have a very low ROAS, since we’re only reaching consumers with no intention of purchasing right away.
As we invest in different parts of the journey, it impacts the overall ROAS of the campaign.
Graphing the ROAS curve
Most brands will see that when graphing ROAS versus media spend, the chart loosely follows a bell curve.
We monitor ROAS and media spend together, because we ultimately want to maximize revenue to grow the business.
When a brand focuses only on ROAS and high ROAS campaigns, they lose out on potential revenue.
Not only does the brand miss out on revenue in the short term, but over time the ROAS curve shifts to the right due to brand demand increasing. As brands invest in building an audience, they increase the number of consumers in the Consideration and Purchase stage of the customer journey.
This means that a brand that focuses only on high ROAS audiences, is actually losing out on future revenue as well.
In order to maximize revenue, it’s imperative that a brand identify their optimal ROAS and maintain that while scaling the campaigns.
Calculating your optimal ROAS
Brands can have different ways of calculating their optimal ROAS, but a basic guideline is to use your average margin and average order value to identify your break-even point. You can then define an acceptable margin to create a baseline optimal ROAS.
Once you have defined your optimal ROAS, you can optimize your campaigns to that. If your ROAS dips below your optimal, you know your campaigns are losing money. If your ROAS is higher than your optimal, you’re leaving money on the table.
Maximizing revenue for growth
Instead of focusing on high ROAS or maximizing media spend, it’s more important to maximize revenue while maintaining your optimal ROAS. As you continue to build your audience, your campaigns will continue to scale and allow you to grow your business.
We recommend budgeting quarterly and reviewing your forecasts after any major marketing moments. For example, if you have a major press placement or influencer mention, this may impact your audience size, allowing you to spend more while maintaining your optimal ROAS. It’s after these moments, you’ll want to revisit your budgets.
Optimizing and focusing on the right KPIs will allow you to consistently grow over time and not fall trap to vanity metrics that hold your business back.