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Why ROAS Does Not Equate To Long-term Business Growth?

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Saffron Edge

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Jun 5, 2022

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7 min read

What is the first measure marketers use when evaluating the performance of an eCommerce ad campaign? Return on advertising expenditure, or ROAS. It is a marketing term that has become the most important KPI for growth marketing. Today, we are here to explain why relying entirely on ROAS is a myopic vision of success that will hinder your DTC eCommerce performance! Source: Pexels

There is nothing inherently wrong with ROAS as a statistic. It is essential to monitor your return on ad investment (conversion value divided by ad budget). Incorporating ROAS as a metric is pretty obvious in a D2C Marketing strategy. However, this is only part of the equation. If we are discussing marketing (specifically growth marketing), it is harmful to the firm to focus just on ROAS.

In this post, we will demonstrate a new method for measuring the performance of your sponsored advertisements and provide three steps for shifting your attention from ROAS to CLV (Customer Lifetime Value), which is the key to your business's long-term success.

First: Why ROAS Does not Work for Paid Ads 

Your sponsored advertising is not responsible for generating ROAS. Shocked?! Certainly, this is the truth. Only you can determine whether or not your sponsored adverts are effective at generating website visitors. This phenomenon applies to all forms of marketing, including traditional forms.

Your sponsored advertising is not responsible for generating ROAS. Shocked?! Certainly, this is the truth. Only you can determine whether or not your sponsored adverts are effective at generating website visitors. This phenomenon applies to all forms of marketing, including traditional forms.    pexels-monstera-6289064 Source: Pexels

The commercials serve a little influence in converting a sale. Numerous elements, including your website, product, branding strategy, source credibility, and price point, have a significant impact. Even with the best-paid advertising plan and professionals worldwide, your return on ad spend (ROAS) will be low if your D2C eCommerce store is flawed.

You can only optimize your efforts when you have total control over something. This may contradict what Facebook specialists and growth hackers say, but it is the reality. Remember ROAS, but your key metrics for analyzing sponsored adverts should be CTR (click-through rate) & CPC (cost per click).

Why ROAS is Only Part of Your eCommerce Business's Equation?

Growth marketers should present a comprehensive plan that fosters scalable, long-term business growth. However, growth marketers are more often than not media purchasers in disguise. They may be excellent media buyers who can assist you get a high CTR and CPC, as well as a 2 to 4 times return on ad expenditure (although this is beyond their control). However, media buyers lack a comprehensive approach to growth and the corresponding plan. That is the distinction.   pexels-monstera-5849577-scaled.jpg Source: Pexels Due to this, so many businesses are solely focused on ROAS, especially new client acquisition, while no one considers the wider picture.

Long-standing, successful companies understand the value of attracting consumers and the importance of retaining and optimizing client relationships beyond the sale. If you want your DTC eCommerce brand to expand, you must consider the bigger picture, which necessitates establishing a relationship with your customers rather than simply making a transaction.

This does not imply that a continuously low ROI on your sponsored advertising is acceptable. Consider where and how you are purchasing advertisements. To recruit clients, you will need to invest, especially if you're a new brand - this is a fact of beginning a business.

In DTC eCommerce, you cannot expect to pay $10 one day and receive $20 back immediately. Sometimes you will have to invest more money to educate the public about your brand and products and establish credibility. The younger your brand and the more competitive your market, the greater your investment in this will be required.

Understanding this reality and developing a business plan that can gain a consumer and turn them into a fan - a client that keeps coming back and distributes your message to the globe – is the key to success. The brands that can expand consistently and healthily are the ones who execute this tactic wisely.

What Should eCommerce firms and marketers prioritize? 

The creator of a high-growth business we were mentoring remarked, "We're incredibly good at "Rev'ing," but terrible at "Netting." It's common: a brand appears to be doing well in terms of new sales, but they're losing money in the end!

To succeed, such brands must move their primary focus from ROI to client lifetime value (CLV). ROAS is a component of customer lifetime value since customer relationships begin with a sale. However, it does not end there. After a transaction is completed, you must cultivate a connection with the customer to convert them into a true brand advocate. The objective is to generate a customer who returns to purchase again (therefore increasing their CLV).

They claim that marketing to a new consumer costs five times as much as marketing to an existing customer. Most digital companies purchase traffic from Facebook, Google, YouTube, and other ad networks. This requires ability, but it only focuses on one aspect of the equation: making sale after sale. This is much more expensive and inefficient than communicating with your current consumers.

This is why you must adopt a more comprehensive D2C marketing strategy and why our organization exists to assist brands in doing so. To build and expand, a firm needs to coordinate several moving pieces. It requires increasing CLV and scaling in healthy ways.

Increase Customer Lifetime Value 

Consequently, what strategies should you employ to enhance (CLV)? We outline the process in three sections below.

1. Establish a customer expansion plan. 

To ultimately rely on customer lifetime value and develop a healthy business, you must have a strategy. You must have a "formula" for providing value to customers and generating ongoing profits from them. We are all aware of this; however, there is frequently no plan for increasing the customer's lifetime value. This is not a marketing formula! This directly relates to the core aspects of your company concept. You may ask yourself, "How does your product line look?"

  • Have you considered expanding this product line into other product categories? 
  • Do your product margins sustain your business? Will certain merchandise have greater margins than others? 
  • Are you capable of bundling items to increase the average order value? 
  • Are you building a voice and brand narrative and then communicating in a manner that relates to your consumers' narratives?

2. Establish objectives for your major metrics.

Depending on your D2C marketing strategy, you should have a reasonable goal for client lifetime value and growth. In addition to establishing targets for return on advertising spend (ROAS),  cost per acquisition (CPA), average order value (AOV), and conversion rate, you must also develop objectives for cost per acquisition, AOV, and conversion rate. 

Ultimately, creating reasonable goals for each key indication based on a formula you've established beforehand will unify your efforts toward achieving them and relieve the anxiety associated with uncertainty. We understand that it may appear simple, yet they are all interdependent.

If you know that a client's lifetime value is $100, but your average order value is just $25, you must decide. You may choose to spend $50 on acquiring a new client while still earning $50. Your ROAS won't be outstanding, but your company will be profitable. However, you must consider when you can attain the $100 CLV, but that is a subject for another day.

3. Implement a comprehensive strategy. 

You may create a thorough marketing campaign after determining your product strategy and key metric objectives. This needs expertise in three fundamental areas:

  • Acquisition and Visitors: Includes paid google, Facebook, and YouTube advertisements.
  • Optimization and Navigation of the Site: Superior site navigation, visual improvements, and conversion rate optimization
  • Maximizing Customer Value: Maximize customer value through engaging consumers with efficient loyalty programs, email marketing campaigns, and customer service, among other strategies.
  • Integrating these three components into a winning plan is the only way to produce sustainable, long-term company growth. Focusing on a particular area in isolation may provide short-term success but not long-term success.

Final Thoughts

To thrive, your firm must prioritize customer lifetime value, and your business plan is how you do this. Once you recognize this, you can stop worrying about achieving a ROAS of 3–4x every month simply because every Facebook marketer advises you to. Ultimately, client lifetime value will be the key to your company's sustainable success. Get in touch with our experts to know more!