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Jun 07, 2013

Is a Higher ROAS Always Better?

To some, it seems obvious to stretch your ad budget further by maximizing your Return On Ad Spend (ROAS = how many dollars in revenue you get for each dollar spent). Becoming obsessed with and achieving a 5-to-1 or even a 10-to-1 return may seem like it will make your marketing efforts shine, but at what cost? Today we’re taking a look at a common question from a slightly different view.

Which result would you rather have?

Spend            Revenue       ROAS

$1,000            $10,000          10:1

$5,000            $40,000            8:1

$10,000          $60,000            6:1

 

From the table, you’ll notice that the difference in spend becomes incremental when compared to the higher revenue that’s possible when your business advertising program is thoughtfully managed.

Lets think about the network effects (other than higher revenues) that result from more sales:

  • Better pricing from wholesale suppliers when more quantity is purchased
  • Improved rates from fulfillment partners when more shipments are made
  • Enhanced ability to optimize processes, with the greater volume of metric data is available from broadened results

Measuring tape via wwarbyObviously, some retailers have margins that wouldn’t allow them to stay in business if their marketing programs had a 6:1 ROAS across the board.

Despite this fact, I encourage you to ask the question in regard to measurement: Is ROAS the complete story? 

Which products feature higher margins? Can we take a lower ROAS on those products? 

Third-party software can enable you to maximize sales on products you can afford to. For example, with ChannelAdvisor’s Inventory Driven Search program retailers can dynamically create Paid Search content and keywords for each product—allowing them to optimize spending using business rules tied to these products and inventory quantities. For Comparison Shopping channels, business rules and automatic bid adjustments can ensure a similar strategy is in place.

Does a new customer have a high lifetime value?

If a strong relationship is established with a new consumer, you can usually count on that buyer to come back and purchase time and time again. This may justify taking a lower margin on the first purchase from new customers. Using advanced tactics, such as remarketing, can assist in securing a purchase from a shopper on the verge of converting.

Are there worthwhile conversions other than purchases?

Shoppers looking at your website may complete a valuable action other than purchase on their first visit. Visitor actions such as catalog downloads, newsletter sign-ups and promotional video views indirectly promote sales by establishing trust, developing relationships and educating potential buyers about your products and the trustworthiness of your brand, and should all be considered justification for advertising costs. These actions are important touch points for customers on the way to a purchase. ChannelAdvisor’s custom event tracking software can help you measure these non-revenue conversions and assign appropriate value to them.

Conclusion

These are just a few considerations to make when structuring your advertising budget and performance goals. Bear in mind that while maintaining a high ROAS is an important component of your strategy, it’s not the only detail that matters.

Ultimately, many retailers find that bringing in more revenue is a desirable result, even if it comes at a lower margin. The key is making sure you have enough visibility and automation that you can control your advertising program rather than letting it control you.

Blog post by David Monterroso, Senior Solutions Consultant, ChannelAdvisor.

Image Source: wwarby

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