Opinions expressed by Entrepreneur the contributors are theirs.
Almost every ad report ever produced includes a return on ad spend (ROAS) line. It is often used as the primary indicator of ad effectiveness. The sad truth is that ROAS is an often misused or incomplete metric.
I feel like many advertisers already understand these flaws but won’t admit it. Why? Because they started believing a different story when their incentives got misaligned. If framed incorrectly, ROAS is set to pour more and more money into advertisers’ pockets, even if your ads don’t actually produce a real return.
So what can be done, and how did we get here in the first place?
Related: How to Improve the Effectiveness of Your Marketing Spend by 40%
Where ROAS went sideways
Imagine you run a business and your top CFO candidate told you that he would only take the job if his compensation was a percentage of the amount of money your company spends in a year. Not a percentage of company revenue or EBITDA, just expenses. Would you hire this candidate?
No of course not. No one would accept a candidate who has strong incentives to deprioritize the health of the company for the size of their salary. And yet, brand leaders are ready to strike a similar deal with their advertising partners.
Ad agencies and e-commerce platforms usually receive a percentage of the budget you allocate to ad spend. As your expenses increase, their payment also increases. They are incentivized to get you to spend more on ads, regardless of how effective they are. Here are the five problematic layers of ROAS below:
1. Inaccurate impressions
In the world of advertising, “total impressions” is often used to calculate ROAS. The problem is that not all impressions are created equal. You may think your ad is showing to two million undecided people per month when in fact you may only be getting a fraction of that.
Suppose someone searches for your product by name on Amazon. This already shows a strong intention to buy your product. They don’t need to be “impressed”. However, as your advertising team improves this product, it now appears first in search results.
Online marketplaces would count this as an impression attributable to your advertising campaign, which is technically true. But you don’t care about impressing customers who are already considering buying from you. You want to get in front of customers who have little or no knowledge of your product.
Worse, algorithms can count every time your product appears on a search results page as an impression, even if it appears at the bottom of the page and the shopper never scrolls far enough to see it.
Related: Ecommerce Analytics: 4 metrics that are always overlooked
2. Incorrectly counted clicks
Let’s build the same scenario as before. Suppose someone searches for your product by name on Amazon, sees your product appear at the top of the results page (as it should), and then clicks on that product listing.
Has this buyer been converted? No, but the ROAS formula in this market may not be discriminatory. These clicks would be counted as attributable sales alongside the clicks that actually come from consumers discovering your product for the first time, through your advertising program.
In addition, ROAS often indexes too much on last contact attribution. The last touch (or last click) is the last step in the customer journey to your ad, but it may not accurately represent the impact of each touchpoint in your advertising strategy on that sale.
3. Unnecessary Keyword Spending
Suppose you sell probiotics on Amazon. Let’s also say that you rank very high for the search term “probiotic for women over 50” and your ad team offers you to bid on that keyword. Once your product ranks high for that keyword phrase, your ads may not do much because the product is already showing up at the top of organic search results.
Brands are sometimes surprised when they turn off their ads and still get nearly equivalent results. Daily attributable sales revenue may have been $10,000 when the ads were running, but only dropped by $1,000 after the ads closed. So, was all that $10,000 in revenue really attributable to your ad campaign?
Once you rank well for a term, organically, it may be time to adjust your ad spend. Knowing when to do it – and how to calculate the actual ROAS after that point – requires incredible data science.
Related: Good decision-making requires good data
4. Block and tackle
There may be times when you need to leverage ad spend to lock in the top line of a search or to weed out competitors who may have stolen sales when consumers searched for you. Knowing when and how to do this, again, requires brilliant data science. And no matter how you tackle them, these moves will have a big impact on your ROAS.
5. Accounting for cannibalization
What are you willing to pay to continue advertising on a page you’ve already won organically? And how do you measure that ad spend when a lot of it cannibalizes organic sales? Accounting for cannibalization is fundamentally different from saying we spent X to get Y. Stellar data science is needed to help you account for dynamic cannibalization factors that depend on keywords, ad placement, and placement. organic that will destroy standard ROAS calculations.
Related: The 5 Steps to Selecting the Best Advertising Agency for Your Business
A new look
ROAS desperately needs new metrics, rooted in modern data science and mapped to better incentives. It’s the future, and many companies (like e-commerce accelerators) are already using new frameworks to quantify the real impact of an advertising strategy.
In an ever-changing economy, advertising money is precious. If you don’t want that money wasted, you need a partner whose incentives are closely aligned with yours. Be aware of potential partners who will make more money when you spend more on advertising. Instead, look for a partner whose ROAS methodology is grounded in the latest data science and only wins when you actually do. They will be able to focus on the true impact of your ad spend, helping to deliver meaningful insights that will propel your business forward.