The Problem With ROAS
ROAS as a metric for performance marketers is that it over-incentivizes first orders, and under-values more costly channels.
By: Matt Osman
Co-Founder & CEO @ Treat
Why do marketers use ROAS?
ROAS stands for return on ad spend. It is a measure of the effectiveness of an advertising campaign.
ROAS is calculated by dividing the total revenue generated from an advertising campaign by the total cost of the ad spend.
For example, if a company spent $100 on an advertising campaign and generated $200 in revenue, the ROAS would be 200/100 = 2. This means that for every dollar spent on advertising, the company generated two dollars in revenue.
ROAS can be a Deceptive Metric
The problem with ROAS as a metric for performance marketers is that it over-incentivizes first orders, and under-values more costly channels.
The best and most resilient e-commerce brands have a high returning customer rate, but optimizing for first order value alone could mean you’re sacrificing channels that bring in your BEST customers - those who come back again and again.
This is exacerbated by the fact that most first orders are discounted, which means they’re not as profitable for the company. Some companies even take a loss on first orders…
Focus on CLV and Retention
We believe brands should optimize their acquisition efforts towards high-LTV customers and the channels that they come through.
We do this by leveraging 1st party or owned data, 3rd party demographic data, and machine learning to create an enriched customer profile that we use to predict LTV.
Now, marketers can use a real-time LTV:CAC ratio by channel or campaign to get the most out of their ad budget. This is marketing efficiency powered by customer context.
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