Ditch the Short-Term Thinking: Reconsidering ROI and ROAS as KPIs
When measuring results, ROI (return on investment) as a KPI normally comes to mind first. In marketing, it could be misleading though. Byron Sharp calls it a ‘stupid metric…. that can send you broke’. According to Peter Field, it’s ‘incredibly dangerous’. How about ROAS (return on ad spend) then? Tom Roach, a Marketing Week columnist with over 20 years’ experience as a strategist in marketing and communications agencies, calls it ROI’s “digital twin”.
According to Roach, digital marketers and their finance people will need to change their mindset, philosophy and understanding of how brands really grow and how ads really work.
Can either ROI or ROAS be a reliable KPI to help marketers realize impact? Check out our selection of insights from Tom Roach’s recent analyses on the subject:
- ROI does not mean “results”. In Tom Roach’s words, ROI’s seductive power for marketers is rooted in its origins as an accountancy term. However, most people use it inaccurately to mean ‘results’. Marketing Week’s ‘Language of Effectiveness’ survey 2022 suggests ROI is such an important metric for marketers because it’s what they believe their boards want to hear: 48% of marketers say ROI is the most important metric for their CEO, CFO and board members. Marketers know that boards like hard numbers, and there’s no harder-looking metric than ROI. As Les Binet likes to say: “Effectiveness first, efficiency second – net contribution to value first. ROI is a useful metric but not the only one.”
- Focusing on ROI tends to obscure the scale of effectiveness. Over-focusing on ROI can disguise what really matters: the absolute amount of profit or revenue generated. What matters most is how effective something is at achieving its objectives; how efficient it is at achieving them is secondary. A particular example reveals that a relatively low ROI of 150% on a $10m campaign (campaign A) drove a $5,000,000 profit, while an amazing 500% ROI on a $100,000 campaign (campaign B) drove only $400,000 profit. Plainly campaign A was far more successful despite its far lower ROI.
- The issue with the “return” in ROAS. Digital marketers and finance teams love ROAS, in particular the immediacy, predictability, the near instant reaction of the platforms and their algorithms, the confidence that if they plug the number into the adtech, it will buy them a sale. The word ‘return’ in the name creates an illusion of causality that just isn’t true from how it’s calculated. The ‘return’ means the total sales from people who happened to be targeted with ads during a set period of time. If someone buys something at some point soon after they were targeted with an ad, it’s marked down as a ‘win’ for the platform. Ex-Adidas marketer Simon Peel refers to ROAS as ‘credit for ad spend’.” Whereas ROI is ideally calculated using market mix modelling (MMM, aka econometrics), ROAS is calculated using digital attribution, which can vary from platform to platform.
- ROAS can take credit for other channels’ earlier work. The last platform to receive a click within the chain might receive all the credit. ROAS can foster a sense that channels ‘compete’ rather than work together. It only measures what happens in the final third of the pitch. As Peel says: “It is a fraction taking credit for the whole.”
- Chasing ROAS chases easy sales, not growth. The closer an audience is to the buying decision, the higher the ROAS will likely be. These are people who already know you and are ready to buy. This approach can make brands inward-looking and too focused on existing customers, rather than on reaching new customers. To achieve growth, you need to fill your funnel with people who are further away from purchase, so will naturally deliver a lower ROAS. Also, having a more balanced plan to promote growth rather than expecting all activity to have a high ROAS and switching off anything that doesn’t is important.
In Roach’s words, like ROI, ROAS has been presented as a growth metric, when it’s actually anything but. In fact, ROAS appears precision-engineered to keep brands small. If teams are set up to optimise everything to ROAS as a KPI, they could be unwittingly pushing an agenda that sets them against their colleagues and is to the detriment of their organisation.
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