The math on discounts is brutal.
Posted: Sun Dec 22, 2024 9:45 am
Why ROAS (and other Marketing KPIs) Fail.
I believe ROAS (Return On Ad Spend) is a flawed and often misleading KPI.
Simply put, Return On Ad Spend doesn’t incorporate uk phone number database all the factors that go into a true omnichannel marketing campaign.
Below I highlight the most significant reasons why I believe this.
ROAS Problem #1: ROAS Doesn’t Measure Profit
The number one issue with ROAS is that it measures revenue, not profit. This creates misleading information.
Discount campaigns are a great example. While discount marketing campaigns can convert well, the profit generated isn't always praise worthy.
We went over the relationship of conversion, discounts, and profits in full detail here.
However, to illustrate how misleading ROAS can be, I want to go over a quick example.
Imagine a product with a 30% profit margin (costs $70 to produce, and is sold for $100). Creating a 20% discount actually decreases your profit by two-thirds (66.66%)!
Discount: $100 * 20% = $20
Gross Revenue: $100 Sale - $20 Discount = $80 Revenue
Gross Profit: $80 Revenue - $70 COGS = $10 Profit
% Change: $10 Profit / $30 Original Profit = 33.33% of original profit (a 66.66% decrease).
Meanwhile, your ROAS numbers are through the roof because you are generating $80 revenue on $10 conversion costs.
I believe ROAS (Return On Ad Spend) is a flawed and often misleading KPI.
Simply put, Return On Ad Spend doesn’t incorporate uk phone number database all the factors that go into a true omnichannel marketing campaign.
Below I highlight the most significant reasons why I believe this.
ROAS Problem #1: ROAS Doesn’t Measure Profit
The number one issue with ROAS is that it measures revenue, not profit. This creates misleading information.
Discount campaigns are a great example. While discount marketing campaigns can convert well, the profit generated isn't always praise worthy.
We went over the relationship of conversion, discounts, and profits in full detail here.
However, to illustrate how misleading ROAS can be, I want to go over a quick example.
Imagine a product with a 30% profit margin (costs $70 to produce, and is sold for $100). Creating a 20% discount actually decreases your profit by two-thirds (66.66%)!
Discount: $100 * 20% = $20
Gross Revenue: $100 Sale - $20 Discount = $80 Revenue
Gross Profit: $80 Revenue - $70 COGS = $10 Profit
% Change: $10 Profit / $30 Original Profit = 33.33% of original profit (a 66.66% decrease).
Meanwhile, your ROAS numbers are through the roof because you are generating $80 revenue on $10 conversion costs.