"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Tim Mayer, chief marketing officer at Trueffect.
At a conference years ago, I heard Paul Ryan, Overture’s former chief technology officer, debate the benefits of optimizing to the return on investment (ROI) metric vs. the return on ad spend (ROAS) metric.
In those days, many marketers optimized paid vs. organic search, and all marketers focused on acquiring leads from a single page – the search page. Ryan advocated the advertiser-centric ROAS metric, reasoning that just one conversion could yield a 100% ROI, but one conversion does not make a viable business.
Marketers used business metrics such as ROI because that’s what they were familiar with in the pre-digital world. Ryan argued that the goal should be growing business and getting incremental conversions, which a focus on ROAS can provide.
Advertising has changed much since then, in terms of how users can be accessed across channels and devices. But have advertisers made the adjustments needed to optimize for the metrics best suited for today’s advertising world?
Defining ROI And ROAS
ROI optimizes to a strategy while ROAS optimizes to a tactic, yet some marketers use these terms interchangeably. ROI measures the profit generated by ads relative to the cost of those ads. It’s a business-centric metric that is most effective at measuring how ads contribute to an organization’s bottom line.
ROI = profits-costs x 100 / costs
In contrast, ROAS measures gross revenue generated for every dollar spent on advertising. It is an advertiser-centric metric that gauges the effectiveness of online advertising campaigns.
ROAS = revenue from ad campaign / cost of ad campaign
With ROAS, marketing is considered a necessary cost of doing business vs. ROI, where marketing is an investment to grow a business’s profits incrementally. While using both metrics in tandem is useful, the pendulum is swinging back from the widespread use of the ROAS-focused model in digital advertising, to a more rigorous ROI-focused model.
ROAS: A Cost, Not An Investment
The ROAS model can increase advertising expenses across all channels if marketers treat advertising as a cost while seeking additional market share without the discipline of a defined profit margin target that would keep bids and spending in check. Some ad tech vendors push this metric, but it can lead to advertisers feeling a need to spend budget without truly understanding the incrementality of each additional dollar of media spend. Advertisers are conditioned to be so worried about missing out on an impression that they don’t step back and ask what the impact would be if they had not served that particular impression.
Today, consumers interact with ads and content across multiple channels and devices before converting. We are at the forefront of the transition to linking many of these interactions to conversions and generating directionally accurate metrics. Among people who see and interact with mobile ads, 32% of conversions occur on a different device, Facebook’s Rob Creekmore said recently.
We are still stuck in an ROAS model, wherein we treat advertising as a cost that is siloed in a specific channel. In reality, much of our advertising is multitouch. ROAS does not measure the true impact of one channel on another, such as display’s impact on search, or offer an understanding of the incrementality of media dollar investment, which the ROI metric provides.
The rising costs of advertising and the availability of advanced attribution and offline measurement has begun moving the industry toward more business-focused metrics, such as ROI, and away from ROAS.
This will change the dynamic of media agencies and ad tech vendors, forcing them to evolve their business models and pricing to become more transparent and focused on driving business performance, not just advertising performance. As a result, advertising vendors will evolve into stewards of advertisers’ media dollars, with a focus on measuring how advertising impacts clients’ business through ROI, rather than optimizing to ROAS, their own advertising-based metric.