Return-on-ad-spend (ROAS) has long been used as a measure of campaign performance and profitability when it comes to PPC and paid social.
The ROAS number in isolation is never a measurement of success or failure. What ROAS means in terms of actual profitability is what the vast majority of advertisers should consider.
A 4:1 return, for example, is often cited as a ‘good’ return based on benchmarks.
If a 6:1 was required for you to break even with your margins, average order value and operating costs, then the 4:1 wouldn’t be a measurement of anything other than how much money you’re losing.
That being said, you don’t always need to see a directly profitable return.
Considering what an acceptable target is starts with understanding where you sit on the need to balance short-term profitability and long-term business goals.
Let’s explore some of the most common examples.
When there’s recursive revenue
If you offer a subscription service, requiring too high of a return on the initial customer acquisition is likely to block onboarding and growth.
Here, the lifetime value of the customer needs to be considered when setting targets. You’re not just spending x to get y; you’re spending x to get y across a number of months.
It’s very common in these instances to give at least the initial sale value to acquisition and for profit to be seen through the recursive element. This allows you to open up acquisition whilst ensuring that the activity is profitable for the business overall.
You may run this campaign at a 1:1 ROAS, meaning that for every £1 spent on advertising, £1 is generated in revenue. You may choose to run it at a negative ROAS based on the initial sale, knowing the lifetime value of the customer.
ROAS still has a part to play here, though. The campaign needs the target in order to bid effectively. Just because you don’t need to be profitable doesn’t mean you should be careless.
Modelling out what the ROAS is as a break-even or acceptable loss on the front end will enable you to have a threshold to scale the budget under; even if it’s a negative, there’s a huge difference between 0.5:1 and 0.005:1.
Breaking into new markets
Whether it’s a new geographical territory or a new product that’s about to launch from your brand, when going into uncharted territory, setting expectations on return can damage the mid and long-term goals of the business.
Whilst it would be great to see activity launch and hit the ground running, new markets take time to get on track with your core market.
Without the established brand presence, social proof and usually many years of learning on messaging, pricing, offers and what motivates the customer to buy, it’s normal to expect a lower conversion rate for a period of time in these areas.
Making a knee-jerk decision to pause activity when it hasn’t had time to go through the process of testing and learning might see this month’s marketing report and P&L in a more positive light, but at what cost?
Having cross-market resilience protects against when there’s a drop in search demand, a new competitor enters the auction, or your offer doesn’t hit the mark in your core territory.
Almost all PPC accounts demonstrate Pareto distribution, where a very small number of keywords and products carry performance in your core territory. It can leave you very vulnerable to seeing performance crash at the slightest deviation.
In the short term, there might be a period of not seeing a viable ROAS. Campaigns in new markets, once established, will give you resilience in your account and business.
From a growth perspective, you’ve also paved the way for other upper-funnel marketing activities to follow suit and expand once the initial journey is complete with those who have purchase intent via paid media.
The mid and long-term value here is huge, so it needs to be considered against the shorter-term ROAS objective.
That being said, it doesn’t hurt to know what ‘good’ looks like so that you have something to aim towards and measure against regularly for tracking progress.
Factoring in other marketing channels
Attribution can be a complex subject.
The simple dialogue is that there will be a benefit from ad spend that isn’t measurable.
This can be due to conversion tracking limitations, the complexity of some user journeys or delayed future benefits.
The most common added values:
- Visual campaigns (such as Meta) drive brand search, which gets captured by “organic”
- Customers from paid go into email lists, which then capture ongoing revenue
- Repeat sales from a customer initially acquired through advertising
- Users who aren’t measured due to tracking blockers
- General brand uplift from impressions served and website visits triggered
In all instances, I don’t believe it’s a call to therefore run ads at a break-even or loss; it’s a conversation around where you sit on a sliding scale of short-term profitability-focused or longer-term growth-focused.
Very often, search advertising is the key acquisition source for a business. This is due to the user having intent through actively searching for the product or service at the time. You can normally see the P&L impact immediately when something drops or rises significantly.
If you’re more short-term profitability-focused, know that when you’re hitting your target ROAS, there’s additional value being provided from paid media.
If you’re more growth-focused, you may want to consider reducing targets by a fixed percentage to compensate for the situations mentioned above. This offsets some of the short-term return for the purpose of capturing a higher sales volume and market share.
The exact percentage, I don’t think, is knowable as it’s far too complex to accurately work it out. I’ve always estimated it at somewhere between 10-15%.
I’ve worked with a number of newer brands that only have paid media running and no other activity. Here, you can see the other areas start to build, and the campaign measurement isn’t quite getting the full credit for the value it’s providing. It worked out at about 10% in most instances.
If you’re an e-commerce store, you could take your Klaviyo email performance or Shopify repeat customer rate to give you an indicator — there’s likely to be a delay before seeing the payback if you take this approach, though.
Either way, your campaign isn’t likely to be adding double or triple the value it’s showing unless your conversion tracking isn’t working correctly.
Not the most glamorous of topics, but there are very often operational considerations that we, as advertisers, don’t always know to ask about.
A situation where an e-commerce brand is overstocked on a particular brand or product can be another example of where it’s useful to not factor in ad profitability to support a broader business goal.
Where I’ve seen this occur most commonly is when a brand has stock that’s incurring storage fees at their 3PL, either due to uptake not being quite what was anticipated or a supplier sending too much stock.
In this instance, trading out of the stock and converting it back into usable cash for the business is far more valuable than needing to see every unit sell with an optimal profit margin.
Here, setting targets low enables you to force budget through the campaign to grab attention. Doing so starts to clear out the surplus, and things can start to move forward.
Being mindful of ROAS here still has a use. You might not want to see the ideal target. But running at a target that covers ad spend and product cost would be advisable to ensure you’re not losing money.
When you’re raising funding or prepping for valuation
Another common scenario which breaks the rules on the typical SME approach to ROAS and paid media.
If you’re VC-backed, funded or prepping the business for valuation in the future, shorter-term goals like month-to-month P&L position become less of a priority in exchange for the bigger picture.
In these instances, showing product adoption, owned first-party customer data and overall monthly customer acquisition is the priority.
A brand may choose to run ads at a loss or break even on the direct return, knowing that this enables them to capture the most possible customers in their market.
The payback here is very long-term focused, and providing that the funds continue to come into fund activity, the return is somewhat irrelevant within the agreed budgets.
That being said, once again, there may not be a need for a direct return, but that doesn’t mean that it should be completely disregarded as a factor in driving performance in line with this goal.
With Google Ads bidding strategies in particular, there’s often a tipping point whereby lowering ROAS or moving to a maximise strategy doesn’t have the continued linear effect of lower ROAS equals more customers.
Very often, once you reach the tipping point, you end up spending more and not seeing any more customers. It’s at this point you may have found your optimal non-profitable ROAS.
After all, if we’re focused on long-term goals and the most customer acquisition, we want more customers, right?
If that budget could go into a different ad channel or acquisition source, then it’s far better spent.
Finally, being aware of what return would be profitable in these auctions and how achievable it is, is still very useful. Typically, businesses in this cycle will focus on acquisition aggressively for a number of years whilst funded before pivoting to a profit-first approach in prep for sale.
In each of these instances, we can see that there’s a benefit to not needing to see a positive ROAS in the short term. The longer-term business goals can be extremely valuable!
Considerations need to include what you need to get there, though. If there are suppliers, staff and costs to pay, then you likely need to prioritise profitability.
I don’t see profit vs growth as a black-and-white decision. It’s a sliding scale that will adjust continually over time.
It’s a useful conversation to have in your business. It helps to aim at the right activity on a tactical day-to-day level. Knowing what your business goals are enables you to set expectations for the outputs of your PPC.
If you’re short-term profit-focused, you shouldn’t be measuring or expecting sales volume to grow significantly. Similarly, if you’re growth-focused and you’re going after volume, you’d expect to see a lower ROAS and overall profitability.
Want to find out if your current ROAS is profitable? Try our simple and effective calculator here.