What is ROAS and why it’s not the Holy Grail KPI everyone thinks it is

I have a confession to make. Once upon a time I also thought ROAS was all that mattered. It’s a metric that got popularized by Facebook ad experts since it allows us to quickly calculate how much revenue we are getting back vs how much ad spend we put it. It even show up on our ad manager dashboards pre-calculated so no actual calculation even needs to be done.

Simply put:

ROAS (Return on As Spend) = Revenue / Ad spend

Now, I have noticed many people in this space just go on and on about ROAS as well as the Revenue they’ve generated. But you will never ever see them gloating about how much profit they made or the true ROI on their marketing efforts. That’s because it’s not sexy. Its not eye-brow raising. Nor is it frankly their problem (unless it’s their own business). But it’s the reality that grounds everything together in a business. Focusing on the wrong KPI is like navigating a ship with faulty instruments, eventually you will crash into something. Case in point is Karmaloop who saw positive ROAS all way down to bankruptcy. With their deep discounts, it was inevitable that ROAS will be high and positive. Until you lift the veil and see…

That regardless of the top line revenue that their marketing dollars generated, very little profit was actually made. This goes along with another fallacy I see out there in the world, the thinking that discounting to generate sales is a good idea. Your marketer will definitely recommend that because that the easiest lever to pull to make him/her look good. It’s so easy to increase the marketing performance by sacrificing profit. Harder is to sacrifice optimizing for a local optima and instead optimizing for global optima aka brand building. But that’s long term game, aint’ nobody got time for that! 😑

ROAS is just an efficiency metric that should be used only to compare efficiency not magnitude. You can’t expect a marketer to be able to generate 10X ROAS on your $1,000,000 budget given his/her past results of 10X ROAS on $10, 000. It’s just not reality (But they won’t tell you that). In the mainstream, ROAS is easily mistaken for either a marketer’s competency or justification for higher ad spend. Either way, it’s used as metric that glosses over many aspects of the business and arbitrarily makes people running these campaigns look good. Really, it should only really should be used as a quick benchmark for the top line efficiency of ad spend. Something you glance at from time to time rather than the metric that defines your life.

ROAS in the marketing industry is much like a metric in the financial industry which every major financial news outlet obsesses over called shareholder value. However, rarely does maximizing shareholder value actually make the needle move for the business unlike maximizing free cashflow – which only the elite CEOs actually obsess over.

We have come a long way from the days little trackability on online marketing performance. But there is probably a lot more ways to go.

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