Why you should never optimize for channel ROAS

Learn how to approach the performance of your business here

Yes - it may seem like an aggressive title, and i am sorry for the chok that i might have given you, but there is a lot of truth in the message.

Measuring the effectiveness of your marketing per channel through an ROAS number may seem like the only right thing to do, because it is straightforward because If the channel "works," and spits out number that you can have a relation to, you also know if you should invest further into the channel or lower the spend, right? 

The reality is that it's just not that simple, and this is the no. 1 thing business owners struggle the most with because they want to track every single marketing cost down to if they are generating revenue/profit. I emphasize with the thought, but it not that simple, and i'll explain why in the next 5-10 mins time.

Attribution is a lie:

Attribution and ROAS measured per channel is so misleading that they should never be a guide - at best - for where your marketing cost should go. If you think about it, the attribution of each channel is built from each individual channel, and every channel wants to take credit for every conversion that happens. They are in other words super biased and want to look as good as possible for you to think that they provide your business with more growth than they in reality do.

In other words, the data you base your marketing decisions on is not always "accurate" if you only look at each channel's ROAS, UNLESS you have a stellar server-side tagging setup (which i recommend you to have 10/10 cases), but that's topic for another day.

Let me give you 1 example.

It's November and your marketing department are reporting amazing growth from all channels and keep the momentum and pushing more and more on each channel. Numbers look great so nothing to worry about as they perform above their break-even.

oh wauw - amazing growth!

Happy days right? 

Not really, because the CFO then reports back a wildly different situation back from their finance team who has just wrapped up the month, and the results are bad!

They lost money on all the "growth" they are acquaring in November, and when they set up costs vs. income it now looks like this:

oh ouch!

What really happened is that both marketing channels made themself look better by attributing all possible conversion to they channel itself

Hmm - how can we maybe solve this in a super simple manner? 

Introducing the Marketing Efficiency Ratio (MER).

It's actually quite simple.

We need 3 constant numbers and 2 formula, all packaged into a synonym called "MER" (Marketing Efficiency Ratio) and aMER (Acquisition Marketing Efficiency Rating)

MER is based on 2 numbers - total revenue and advertising budget - 2 constants that no platform can touch or manipulate. 2 constant numbers, no matter how you look at them. The same is with aMER but instead of overall revenue, aMER is based out of new customer revenue (which in my optionen, is much more valuable to track)

Why is MER and aMER better than ROAS?

Firstly, MER and aMER is a more holistic approach to measuring marketing effectiveness as it takes into account all channels and campaigns in your marketing strategy. It gives you a more nuanced picture of how well your marketing investment are working for you across all channels.

Secondly, MER and aMER is more resistant to manipulation and false attribution as it is based on total advertising budget and total revenue/new customer revenue, which are more objective numbers that cannot be manipulated in the same way as ROAS.

In short, MER is a more reliable KPI than ROAS as it provides a more comprehensive picture of your marketing effectiveness and is less susceptible to manipulation.

On top of that you can actually hold your advertisement cost up against your new customer revenue with aMER (Acquisition marketing efficiency rating) which simply is all new customer revenue / all advertisement spend = aMER. Tracking and measuring your new customer growth is often overlooked, but so important if you're serious in building a larger ecommerce brand.

So... how do i implement this?

Transitioning from ROAS to MER and aMER requires a strategic approach, integrating new metrics gradually into decision-making processes. This shift involves educating teams about the benefits of MER/aMER for a holistic view of marketing efficiency, and adjusting reporting systems to track these metrics. It's about creating a culture that values comprehensive performance indicators over simplistic ones.

Businesses should also focus on customer lifetime value (CLV), conversion rates, and customer acquisition costs (CAC) alongside MER and aMER. These metrics offer a broader perspective on the effectiveness of marketing efforts, indicating not just efficiency but also the quality of customer relationships and long-term value generation.

MER and aMER are versatile metrics that can be adapted to various business models.

Their application might vary depending on the specific marketing and sales funnels of a business, but the underlying principle of assessing efficiency across all marketing efforts remains relevant. Tailoring these metrics to reflect unique business objectives and market dynamics is crucial in todays marketing era.

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