ROAS IS NOT enough

Hey there

I hope this email finds you well. Today, I want to address a common misconception that plagues countless direct-to-consumer (DTC) brands' Facebook marketing strategies: the overreliance on Return on Ad Spend (ROAS) as the ultimate metric for assessing campaign success.

In our audits of hundreds of DTC brands every month, we consistently encounter this dangerous trend. Approximately 99% of these brands prioritize ROAS above all else, often to their detriment. While ROAS can be a valuable metric, its misuse can lead to financially disastrous decisions.

Allow me to explain why this is the case. ROAS, on the surface, appears to provide a clear indicator of the effectiveness of your advertising efforts by measuring the revenue generated for every dollar spent on ads. However, it fails to capture the full picture.

Are you good with numbers? Take this marketing test...

Imagine you're in charge of two ad campaigns, one for a premium water bottle and one for a pack of gourmet coffee beans:

The water bottle campaign has a higher ROAS.  Does that make it the clear winner?

If you answered 'yes,' you might be making a big mistake.

The right answer is - we don't have enough data yet.

You need one more data point: the profit margin on each sale. 

Profit is where ROAS (Return on Ad Spend) falls short. It only tells you how much revenue you make per dollar spent, not the money left in your pocket.

Let's say the water bottle has a 30% profit margin, while the coffee beans boast a healthy 50% margin.  Here's how that changes things:

Suddenly, the coffee beans campaign looks far more attractive, even with a slightly lower ROAS.  This is the power of POAS (Profit on Ad Spend).

Why ROAS can be dangerously misleading

1. Different margins: High-ticket items often have slimmer margins, making a high ROAS less impressive than it looks.

2. Changing margins: Your costs might increase over time. ROAS won't catch it, but a drop in POAS will raise a red flag.

3. Lifetime value: A lower-ROAS campaign might acquire customers who spend more in the long run. ROAS doesn't see the future.

So…

Don't just follow the jargon.

ROAS is thrown around constantly, which can make it feel like a rule rather than a tool.  But numbers only tell the whole story when you're asking the right questions.

What to do instead

• Use bid caps: Set a bid limit that aligns with your desired POAS. 

• Track everything: Make sure your product costs (manufacturing, shipping, etc.) are factored into your profit calculations for true accuracy.

• Focus on POAS, not just ROAS: Make profit the driving metric behind your ad strategy.

Remember: Statistics isn't always straightforward. The smartest move in marketing is often the one that feels counterintuitive at first.