The Hidden Pitfalls of ROAS: How it’s Killing Performance Marketers

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Evolution of Performance Marketing

Over the past decade, the marketing landscape has witnessed a shift with the rise of Performance Marketing. The focus on low-funnel attribution and deterministic metrics, such as Return on Ad Spend (ROAS), has become the norm. However, the blind reliance on these metrics may be detrimental to the growth and success of performance marketers. Let’s explore the limitations of ROAS and advocate for a more nuanced approach – Incremental Return on Ad Spend (iROAS) – as the true North Star for measuring marketing performance analysis.

Limitations of Deterministic Attribution in ROAS

ROAS relies heavily on deterministic attribution, connecting ad impressions to conversions using identifiers like IP addresses, cookies, or click IDs. While this method seems straightforward, it has several inherent limitations.

Not All Media Transactions are Impression-Based

Media channels like email, SMS, or outbound call centers operate outside the impression-based model. ROAS fails to capture the effectiveness of these channels, limiting the scope of performance measurement.

Challenges of Log Level Data in Performance Marketing

The reliance on log level data, a comprehensive spreadsheet detailing impression attributes, is another constraint. Not all platforms or walled gardens share this data, creating blind spots in the performance measurement process.

Causality vs. Correlation

ROAS struggles to differentiate between causality and correlation. Did an ad truly influence a conversion, or would the action have occurred regardless? This distinction is crucial for accurate a marketing performance analysis.

Introducing Incremental Return on Ad Spend (iROAS)

To overcome these limitations, the marketing industry needs to shift its focus from ROAS to Incremental Return on Ad Spend (iROAS). This approach considers a broader set of factors, acknowledging the complexity of marketing ecosystems.

Inclusive of Non-Impression-Based Media

iROAS accommodates channels beyond impressions, providing a holistic view of marketing performance. Email campaigns, SMS, and outbound call centers are given due consideration in this more comprehensive measurement model.

Factors in Macro Conditions

Beyond deterministic attribution, iROAS considers macro conditions that may impact sales. Events like Cyber Week or Prime Day can artificially inflate ROAS without necessarily reflecting the effectiveness of marketing efforts.

Emphasizes Incremental Returns

Unlike ROAS, which may mask declining sales with seemingly positive returns, iROAS focuses on incremental returns. This metric provides a clearer picture of the true impact of marketing efforts on the bottom line.

The Need for a Paradigm Shift: From ROAS to iROAS

It’s time for marketers to reevaluate their key performance indicators. Shifting from ROAS to iROAS requires a recalibration of measurement tools and strategies. Advertisers must embrace a more nuanced approach to performance marketing, acknowledging the interconnectedness of various channels and external factors.

In platform vs. Unified ROAS Tools

Each platform reports on ROAS in it’s own silo, with no regard to the overlap between channels. In fact, they’re incentivized to do so, since most of their earnings are ad-driven, and more effective ads (per their reporting) leads to more ad dollars. Thus there’s been an emergence of holistic attribution reporting. In other words, platforms that answer the question, “What’s my ROAS across everything, considering the overlap between the channels I run media on?” While unified ROAS tools solve the in-platform ROAS and interaction effects issue, they still fall into the deterministic traps mentioned above. For instance they’ll report higher unified ROAS during Black Friday for e-commerce brands, the implication being that their marketing is working better during this time, when the reality is that much of the revenue going into that ROAS calculation comes from sales that would have happened anyway simply because it’s Black Friday and people are shopping online, not because of any specific marketing effort.s. True success lies in adopting a model that encompasses a broader spectrum of variables, ultimately guiding marketers towards impactful decision-making.

That is where Keen comes in.  The Keen Platform uncovers key insights that help marketers tie both short-term transaction driving tactics and long-term brand building investments directly to the financial outcomes of the business, empowering them to make data-driven future decisions.  This is done by:

  • Aligning sales and marketing data over time
  • Accounting for prior brand knowledge and external factors that impact marketing
  • Isolating incremental vs. base volume, and quantifying the incremental for each tactic
  • Compare incremental revenue driven by each tactic to the the investment in that tactic to determine profitability
  • Leveraging this knowledge to inform scenario building for future decisions

In the graphs below, you can see how the Keen Platform accounts for the long-term value of marketing, for channels that are brand-building and transaction-driving. 

Additionally, the graphic below shows a holistic view of marketing on all quarters. As you will see, for this brand, marketing from 2020, 2021, and 2022 continued to pay dividends in 2023 – representing the way marketing layers like rock. This view allows marketers to evaluate marketing’s sustained impact on business growth, across all channels.

Although ROAS was once hailed as the holy grail of performance metrics, it is proving to be a double-edged sword for marketers. To thrive in an ever-evolving landscape, performance marketers must embrace Incremental Return on Ad Spend as the new North Star and a tool like Keen can help marketers measure the long term impacts of these kinds of tactics. By doing so, marketers can unlock a more accurate and holistic understanding of their marketing efforts, enabling them to make informed decisions that truly impact the bottom line. 

Want to see for yourself how Keen can create a marketing performance analysis for your business?  Take a tour of the platform today!

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