KPIs mean the world to those whose heads are immersed in the PPC world throughout the day. In-house? Agency? Non-profit? Doesn’t matter. If you’re playing in the search marketing field, you should have a goal to guide you. If you don’t have one, give me a ring and I’ll find one for you.
For e-commerce clients, Return On Ad Spend (ROAS) ((revenue/spend)*100) is often used as a KPI. But it is not the end-all-be-all that many within the industry promote it as.
ROAS is, in-itself, an island. A distant, lonesome island. Without knowledge of the “geographical” context (revenue, spend, and profit), ROAS is meaningless, and even worse, deceptive.
I bring this to the table because ROAS is consistently used out of context. For example: “ROAS was 500% last month, and it’s 1,000% this month, so we are rocking it! Home run!” There’s no context surrounding ROAS in this statement. What did we spend? What happened to our revenue? ROAS alone is just a number that shouts, “Something changed!”
Pretend you just launched your dream business, Flux Capacitor Inc. You’re selling high-quality flux capacitors. Your KPI is an ROAS of 1,000%. Your budget is $2 million a month. For each flux capacitor you sell, you receive $1,000 in revenue. To achieve an ROAS of 1,000%, you’d have to sell one flux capacitor for every $100 you spend. ($1,000/$100)*100 = 1,000%.
Let’s say in March, we achieved an ROAS of 500%, well off of your 1,000% KPI. You make some changes to budgets, optimize your bidding and prepare for growth in April.
At the end of April, you compile some numbers and see that ROAS came through at an astronomical 2,000%! ROAS quadrupled in a month. Your KPI is now being downright dominated! Your company is going to lift you above their heads and haul you through the hallways chanting your name.
That’s ROAS as an island.
So before we let them haul you around the office, let’s take a look at your ROAS in context. We’ll look at MoM (month-over-month) metrics to see how exactly we quadrupled the ROAS.
Wait a second here. April’s spend. It’s $500!?
Ouch, your credit card was declined at the beginning of April. Your ads were only active for a single day the entire month. Doh!
Your ROAS is still 2,000%, but you only spent $500 of your $2,000,000 budget. See how quickly context took you from a marketing champion to something far less than champion-like.
You just decimated Flux Capacitor Inc.’s potential profit by $7,490,000 for April.
It’s an extreme example in many ways, but it proves a point. ROAS is an effective metric to measure the efficiency of your search program, but without context, ROAS is meaningless.
If you have a mature search program and you’ve been using ROAS as a KPI, you may feel slightly at a loss. You shouldn’t. ROAS is a valid KPI in context, especially with a constrained, consistent budget.
But, if you’re looking to take your account to the next level, you’ll want to begin exploring how to maximize your bottom line: profit. Profit maximization is the answer for aggressive advertisers who are looking to break free of ROAS constraints to grow their bottom line. And that is a whole other blog post! My next one actually…