Why Focusing on ROAS Will Hurt Your Ecommerce Business
When measuring the success of an ecommerce ad campaign, what is the first metric marketers inspect? Return on ad spend— also known as ROAS. It’s a marketing buzzword, so popular in fact that it’s become the primary KPI for growth marketing. However, we’re here to tell you why focusing solely on ROAS is a short-sighted view of success and will actually hurt your performance.
Don’t misunderstand, there is nothing wrong with ROAS as a metric. It’s important to watch your return on ad spend (conversion value divided by ad budget). But it’s only one part of the equation. If we are talking marketing (especially growth marketing) it’s a disservice to the business to only be concerned with ROAS.
In this article we’re going to show you a new way to measure the effectiveness of your paid ads, and we’re going to give you 3 steps for moving your focus from ROAS to CLV, which is the key to the long term success of your business.
First: Why ROAS is Ineffective for Paid Ads
The first issue with focusing only on ROAS is that truthfully, it’s not the job of your paid ads to drive ROAS. Shocked?! Well, it’s the truth. Your paid ads can only really control whether or not they are effective at drawing someone in and getting them to a page on your website. By the way this is also true with any marketing including non-digital marketing. The ads only play one small piece of converting a sale. Your website plays a huge role, your product, brand promise, social proof, price point, and more play large (arguably larger) roles as well. You could have the best paid ads strategy and experts in the world but if your ecommerce store is broken, you’ll still have a poor ROAS.
You can only optimize your activities around something that the activities control 100%. This may not be what the gurus and growth hackers on Facebook tell you, but it’s the reality. Keep ROAS in mind but what you really need to judge your paid ads on is CTR (click-through rate) and CPC (cost per click).
Second: Why ROAS is Only One Piece of the Equation for your Ecommerce Business
We’ve talked a lot about the term “growth marketer” before. It’s pretty overused. Growth marketers should be people who provide a holistic strategy that drives long-term, scalable business growth. However, more often than not, growth marketers are really just media buyers in disguise. They may be great media buyers who can help you score great CTR and CPC, and maybe a 2-4x return on ad spend (although that’s really out of their control). But the thing media buyers lack is a holistic approach to growth and the strategy that goes along with it. That is the difference.
Because of this, so many brands are 100% focused on ROAS, particularly new customer acquisition, and no one is looking at the bigger picture.
Long-standing, successful brands know not only the value of acquiring customers, but keeping and maximizing relationships with customers after the sale. If you want your brand to really grow, you need to think bigger, and that requires developing a customer relationship, not just winning a sale.
This is not to suggest that it’s acceptable to have a consistently low ROAS on your paid advertising. Be smart about where and how you’re buying ads. But the truth is, you’re going to have to invest in order to acquire customers especially if you’re a new brand – that’s a reality of starting a business. If you expect to pay $10 one day and see $20 back right away, that is not how business or ecommerce works. Like any other business, you have to invest in order to see a return. You will need to spend more to educate the public about your brand and products as well as build trust. The younger your brand is and the more competitive your market is, the more you will need to invest in this. The key to succeeding is understanding this truth and building a business model that can acquire a customer and convert them into a fan – a customer that keeps coming back and spreads your message to the world. The brands that do this strategically are the ones that will be able to grow consistently and healthily.
What Should Ecommerce Businesses And Marketers Focus On?
“We’re really great at “Rev’ing” but really bad at “Netting”” said the founder of a high-growth brand we were coaching. It’s something we see so often, a brand looks like it’s killing it with new sales, but at the end of the day they aren’t making any money.
To succeed, your primary focus MUST shift from ROAS to customer lifetime value (CLV). ROAS is a part of the customer lifetime value equation because a customer relationship starts with a sale. But it doesn’t end there. After the sale is made, you need to foster a relationship with that purchaser with the goal of turning them into a real brand fan. The idea here is to create someone who keeps coming back to purchase again and again (therefore increasing their CLV).
They say it costs 5x to market to a new customer vs your current customers. Most digital agencies just buy traffic on Facebook, Google, YouTube, and other ad networks. It takes skill to do this well, but again, it’s only focused on part of the equation: making sale after sale. That’s a lot more expensive and less efficient than talking to the customers you already have.
This is why you must take a more holistic approach, and actually why we even exist as a company that helps brands do this. Building and growing a business requires taking several moving parts and making them work together to accomplish one main goal: growing CLV and scaling in healthy ways.
How to Increase Customer Lifetime Value (CLV) Without Losing ROAS
So what tactics should you use to increase customer lifetime value (CLV)? We break it down in three steps below.
1. Establish a strategy for customer growth.
Ultimately in order to rely on customer lifetime value and create a business that is healthy, you have to have a strategy for doing that. You must have your “formula” for how you give value to a customer and create continuous profit from that customer. We all know this, yet so often there is no plan for how we will grow the lifetime value of a customer. This isn’t a marketing equation. This speaks directly to the inner areas of you business model. You might ask yourself questions such as:
- What does your product line look like?
- Do you have plans to expand this product line into other product categories?
- Do your product margins support your business? Will some products have higher margins than others?
- Do you have the ability to bundle products to encourage a higher average order value?
- Are you developing a voice and brand story, and then communicating in ways that relate to the stories of your customers?
2. Set goals for your primary metrics.
You should have a realistic goal for what you want customer lifetime value to be based on your strategy as well as how far you would like it to grow. You should also set goals for other important metrics such as ROAS, average order value (AOV), cost per acquisition (CPA), and conversion rate. If you need a starting point or are wondering how your store stacks up, check out our recent post on ecommerce benchmarks here.
Ultimately, having realistic goals for each key metric based on a predetermined formula that you’ve created will unify your efforts in achieving them and relieve the anxiety associated with having no idea. Sounds simple, I know, but they all play together. If you know your customer lifetime value is $100, but your average order value is only $25, then you have a choice. You can decide to spend $50 on acquiring a new customer if you choose and still make $50. Your ROAS won’t look that great, but you do have a profitable business. Of course, you have to account for when you can achieve that $100 CLV, but that’s a topic for a different day.
3. Implement a holistic approach.
Once your product strategy and goals for key metrics are established, you can implement a holistic marketing strategy. This takes experience and expertise in three key areas:
- Aquisition and Traffic: Including paid Facebook, Google, and YouTube Ads
- Site Optimization and Flow: High-level site navigation, improving site design, and conversion rate optimization
- Customer Maximization: Engage with customers using a strong email marketing strategy, loyalty programs, customer service, and more to maximize value.
The only way to achieve long-term, healthy business growth is to align these three areas into a successful strategy. Focusing on just one area in isolation may give you quick wins, but ultimately will not win long term. This concept is actually why we exist here at Metacake. As an ecommerce growth team, we specialize in combining all three of these practices to holistically drive healthy business growth.
Example of Customer Lifetime Value in Action
To paint a picture of what this might look like in an ecommerce business, we’ll look at one of our clients, a silicone ring company. You can read about the case study of how we used our ecommerce email framework as the primary tactic to drive customer lifetime value, here. They began with a relatively simple product: a silicone wedding ring for people who can’t (or don’t like to) wear traditional wedding bands. They spent months crafting the highest quality and best functioning ring on the market. But they had a bigger purpose in mind, which was to build a brand that truly connects with their customers.
This would prove to be monumental for their business. After all, how many wedding rings does the average person need? Most likely not more than one or two, especially if they’re made to last. For that reason, Groove needed to find a way to add value to their customers’ experience and to encourage them to return for future purchases.
To help with that, they use a blend of the three strategies of a holistic approach listed above. Of course, they invest in site design, paid advertising, and expanding their product line. But just as important is having outstanding customer service, an intentional email marketing strategy, and even outside programs such as their Adventure Channel on YouTube. All of these efforts help communicate with their customers and build real relationships with them, which makes them much more likely to come back and purchase more products. This is how you increase customer lifetime value.
It’s important to remember that your business needs to focus on lifetime value to succeed and your business strategy is how you do that. Once you realize this, you can stop stressing over hitting a ROAS of 3-4x every month just because that’s what every Facebook marketer is telling you. At the end of the day, customer lifetime value will be the ticket to long-term growth for your business.