As my colleague, Michael, pointed out in his ROAS Trap post, the eternal search for a "source of truth" KPI in digital advertising continues. Every ad platform out there (Google Ads, Bing Ads, Amazon, Meta, you name it) touts ROAS as the ultimate KPI.
Consequently, performance agencies base their services on delivering a stellar ROAS. However, relying solely on ROAS without considering your margins only gives you a glimpse of your advertising performance and can wreak havoc on your business.
Once upon a time, ROAS may have been a fine metric to treat as gospel. Interest rates were low, money was cheap, and businesses could scale rapidly even with slim margins.
2023 marls a significant shift in the way eCommerce businesses need to function.
The "move fast, break things" mindset of pursuing growth at any cost is no longer sustainable.
Instead, the focus has shifted towards capital efficiency, making it crucial to reassess eCommerce advertising metrics. It's time to move away from traditional goals and KPIs and embrace a profit-centric approach.
The metrics I would use to measure the performance of your advertising and the impact on your business are Contribution Margin on Advertising Spend (CMOAS), Marketing Efficiency Ratio (MER), and overall Profit Growth. These metrics provide a comprehensive view of your business. Sure, it involves a bit of math, but fear not, there are some nifty tricks to automate this process at the end.
Consider Contribution Margin on Advertising Spend to be ROAS on steroids; it paints an accurate picture of the impact of your advertising.
The formula is simple, Profit over Ad Spend. More specifically, CROAS = Ad Attributed Sales - Landing Costs of Products Sold - Ad Spend - Platform Fees - Rebates and Refunds all divided by Ad Spend.
This formula can be broken down by advertising channel or kept as a total of all advertising. This should provide an accurate figure of your advertising's impact on your business by factoring in all variable costs rather than a simple revenue.
For marketplaces like Amazon, figures like this are especially important, given the hefty Amazon fees levied on sellers for the privilege of using the platform.
CMOAS is a great metric for tracking the impact of ad-attributed revenue however, it fails to see the entire picture of the marketing landscape.
In some cases, Paid Media encompasses the vast bulk of sales, however in the majority of cases there is some sort of equilibrium between organic sales and paid sales. Also, not all campaigns are created equal and fulfill different objectives. It would be silly to compare the performance of an awareness generation campaign apples to apples with a re-marketing campaign.
In order to diagnose the health of an entire advertising apparatus, it is important to zoom out and look at the system as a whole. This is where MER comes in. This is total revenues coming in across all channels and organic (usually measured at the eCommerce platform level if available) over the total ad spend across all channels.
Although profitability has become increasingly important, it is equally important to keep scale in mind when measuring business performance. Top line revenue growth is a good indicator of overall growth in the business. However, it is good to double check profit growth year over year to ensure the volume has scaled efficiently.
In a perfect world, the two should scale together in parallel however marketing is never so simple. Different campaigns plateau at different points due to a multitude of factors.
Profit Growth is a pretty simple metric to calculate. How much profit did you make last period vs. how much did you make this period?
Much like CMOAS, this is all about taking landing costs, advertising costs, and returns/rebates into account. In a healthy scenario, this should scale along with revenue growth. However, advertising costs can easily slip into the realm of diminishing returns. Aligning goals against profit growth ensures that not only can a business scale, but it can scale efficiently and effectively.
The never-ending quest for better metrics in digital advertising has brought us to a whole new story. We've shifted our focus from relying solely on ROAS to embracing a profit-centric approach. And let me tell you, the new big three of digital advertising metrics—CMOAS, MER, and Profit Growth—paints a complete picture of your business's advertising performance and its impact.
CMOAS goes above and beyond ROAS by considering those sneaky variable costs and gives you a more accurate measure of your advertising's impact.
MER steps back and evaluates the overall health of your advertising machine by looking at total revenues across all channels.
Profit Growth aligns your goals with smart and effective scaling. By embracing these metrics, businesses can confidently navigate the ever-changing landscape of digital advertising and make savvy decisions to drive success and sustainable growth.