When your business is spending money on online ads – be that search, display ads, or otherwise – one of the key indicators of the success of these ad campaigns is Return On Ad Spend (ROAS). But while ROAS is a valuable metric and you ideally always want your revenue to outpace your ad spend, it’s important to remember that a solid ROAS doesn’t necessarily translate to strong profits or business growth.
In this blog, I’ll be breaking down the most important metrics to measure and factors to consider when it comes to determining if your ROAS is also contributing to broader business growth and bottom-line profitability.
The ROAS Illusion: What It Measures vs What It Misses
The basic ROAS measurement is simple. It is simply determined by taking the revenue you’ve generated from your advertising and dividing it by the total amount of ad spend you committed. So, as an example, if you put $10,000 into ads and generated $50,000 in revenue directly from those ads, that equates to a ROAS of 5x.
This may be an impressive metric in its own right, but it only tells a very small portion of the story. It basically answers one question: “Are my ads generating revenue?” But, in business, you know that revenue and profit are entirely different things.
Revenue vs Profit: Where Most Brands Get It Wrong
The problem with only focusing on top-level revenue is that it ignores the reality of bottom-line profit – and failing to recognise the numerous expenditures that go into running a business and fulfilling different product orders can create a false sense of financial growth.
So, let’s go back to that previous example of a 5x ROAS where you spend $10,000 on ads and generate $50,000 of revenue. But instead of just looking purely at revenue vs ad spend, let’s also account for all the other costs that come into play. These can include the following:
- The cost of goods (COGS) – so, how much your business spent on the goods and/or services you’re selling.
- Your ad spend
- The costs of shipping and fulfilment
- Staffing costs
- Rent costs
- Costs associated with the software and tools you use
- Any reduced revenue due to discounts/promotions
Let’s break it down as follows:
- Revenue: $50,000
- COGS: $25,000
- Ad spend: $10,000
- All other operational costs: $10,000
With all costs accounted for, the final profit from the entire ad campaign is $5,000 – a far cry from the top-level revenue of $40,000 ($50K revenue – $10K ad spend). It’s a significant shift in final profit and illustrates the importance of not taking top-level revenue at face value – because it does not guarantee high profits or substantial business growth.
That’s why you can have situations where a higher ROAS on low-margin products can lead to minimal profit (or even loss) whereas a lower ROAS on higher-margin products could result in greater overall profits. So, always remember that a strong ROAS won’t always equate to meaningful profits.
The Hidden Cost of Over-Optimisation to Business Growth
While optimising ads on search and social media platforms is an important component of getting the most out of your advertising efforts, issues can arise when you go too far in terms of over-optimising. This is particularly true when you become fixated on only running high ROAS, cheap conversion, low-risk campaigns aimed at warm audiences.
While targeting warm audiences (existing customers or those who’ve previously shown interest) can be a great way to drive revenue in the short-term, it also limits the scope of business growth. Hyperfixating on warm audiences often means you could over-invest in retargeting campaigns while limiting your investment in capturing new audiences or potential prospects. Over time, only focusing on a warm audience can lead to eventual audience fatigue and plateaued growth because you’re putting minimal effort into branching out and trying to get new people in.
This is an issue that can also occur when you only focus on campaigns that drive a high ROAS. After all, if you’re trying to spend as little money as possible to get the best ROAS, this often includes only focusing on customers most likely to convert. While this does make sense on the surface, it also means you’re restricting your business’s capacity to earn newer customers and grow. And, as previously mentioned, ad campaigns that have a lower ROAS doesn’t necessarily mean lower profits – especially if you’re advertising a service or product with higher profit margins.
None of this is to say that you shouldn’t optimise current campaigns for a better return on your investment. However, genuine growth also requires structured experimentation that gets your business and its product/services in front of more people so that you can uncover even more qualified customers.
What Metrics Actually Indicate Real Business Growth
There are a wide range of metrics you can refer to in order to gauge broader business growth trends. Below are just some of the key metrics to consider that will help you gain a clearer picture of growth both in terms of profit and an expanding customer base.
Acquisition and Growth
To assess the expansion of your customer base and ensure that you’re not just re-converting the same people, keep an eye on these metrics:
- New customer acquisition rate – This measures how many first-time buyers you’re bringing in. If this rate stays flat or declines, it signifies your business isn’t gaining new buyers but simply recycling demand.
- Customer Acquisition Cost (Blended CAC) – This helps you measure the true cost of acquiring customers across all channels (not just through paid efforts). This allows you to assess if your current growth efforts are sustainable across the board.
- Customer Lifetime Value (LTV) – Understand the total revenue and profit a customer generates over time. Overall growth becomes far more profitable when a customer’s LTV increases, even if your ROAS decreases.
Signals of Demand Creation
Signals related to demand creation are those that indicate if your brand is building genuine momentum in the market. Some key signals to track include:
- Brand search growth – You can view these metrics on platforms such as Google Analytics and Google Search Console to see if more people are purely searching your brand name over time. This signals that broader awareness of your brand is growing.
- Direct traffic growth – Similarly, keep an eye on how much direct website traffic your business receives. This signals that more people remember your company and are going directly to your site without relying on paid channels or search to find you. And the more new users you’re getting to your site, the more your brand’s name is building significance among new customers and prospects.
- Returning customer base – A good business gains a healthy number of repeat customers, so keep an eye on metrics that show when a customer has returned and made a new purchase. It indicates increased brand strength, satisfaction in your products or services, and longer term value.
Profitability
In terms of separating top-level revenue from bottom-line profit, you’ll want to work in the following metrics and calculations so that you get the complete picture of how any ad campaign or other marketing efforts are benefiting your business’s monetary growth.
All of the following metrics/calculations involve taking the total revenue and then subtracting all applicable costs – not just the cost of advertising or marketing alone.
- Contribution margin (in regards to specific channels or products) – Whether you’re assessing a paid search ad campaign, other marketing-fronted revenue efforts, or the profitability of specific products, you can get to the bottom of what’s making you actual money by taking the total revenue and subtracting all associated variable costs. As mentioned earlier, this can include subtracting costs such as ad/marketing spend, cost of goods, staffing costs, shipping costs, applicable discounts, etc.
- Profit per order – A similar concept to contribution margins, but focusing on what money you keep after all costs with each transaction made. By taking this approach, you can avoid scaling up or overly investing in campaigns that may not be as financially viable as they appear at first pass.
- Revenue after costs (actual profit) – This measurement applies the same principles as the above, but instead of assessing the profitability of specific channels, products, or individual orders, it’s looking at profit across everything. As with the other calculations, you’re taking your total business revenue and then subtracting all associated expenses. This provides a complete picture of overall profits across various products, campaigns, ad channels, orders, and so on. The result is a more realistic picture of your business’s monetary performance rather than just looking at gross revenue.
Drive Positive Business Profit and Growth – Not Just Positive ROAS
If you want to ensure your online advertising efforts are contributing to positive overall growth for your business, not just positive ROAS, Reform Digital can help.
Our team of experienced and driven online advertising experts (from search ad campaigns to social media ads and display ads) can set up and coordinate campaigns that are optimised just right to capture current and new customers who’ll help your business experience strong profit and operational growth – not just top-level revenue.
To get started, reach out to us today for a chat.
