Return on Advertising Spend, or ROAS, is a key marketing metric that many swear by. It tells you straight up how much you’re earning for every dollar you spend on advertising. Quick math for you: if you invest $100 and pull in $500, you’ve got a ROAS of 5:1. Not too shabby, right? But before you break out the confetti, let’s pump the brakes.
A high ROAS can feel like you’re on the money, literally. But it’s not the end-all, be-all. It shows you the ‘what,’ but not the ‘why’ or the ‘how.’ It won’t tell you if a customer is here for the long run or just for that tempting one-time offer. It also doesn’t clue you in on whether you’re spending more than you should to attract a new customer.
While ROAS is a useful starting point, it’s not the whole story. You need to go beyond it and dig into some other metrics to really understand your marketing performance. So, let’s talk about five other essential metrics that give you a more complete picture. Ready to dive deeper?
Metric #1: Return On Investment (ROI)
Return on Investment (ROI) offers a more comprehensive look than ROAS by accounting for all campaign costs, not just ad spend. To calculate ROI, you take your net profit, subtract the total costs involved in the campaign, and then divide that number by your total costs. Multiply by 100, and you get your ROI percentage.
But remember, ROI is about more than just revenue. A high ROAS may look great, but if other expenses—such as labor or software—are sky-high, your overall profitability takes a hit. ROI gives you a fuller understanding of the effectiveness and efficiency of your campaign.
Use ROI to compare the performance of different campaigns, much like you would compare reviews to decide which movie to watch. It’s a guiding metric that can help you decide where to invest your marketing dollars for maximum impact. So keep an eye on ROI; it could be your key to making smarter marketing decisions.
- Formula: ROI = (Revenue – Total Costs) / Total Costs * 100
Metric #2: Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) measures the expense of attracting a new customer. To find your CAC, divide the total amount spent on marketing and sales by the number of new customers acquired. A high CAC can be a red flag, signaling that you might be overspending for each new customer.
But it’s not just about initial attraction; you also have to consider the long-term value (LTV) of a customer. If your CAC is low but your customer engagement or retention is poor, you’re not really winning. The goal is a balance: a low CAC coupled with a high LTV, which indicates both effective acquisition and strong customer loyalty. So don’t just focus on getting customers through the door—make sure they find value in your brand and stick around.
- Formula: CAC= (Marketing Expenses + Sales Expenses) / # of new customers in a time period
Metric #3: Customer Lifetime Value (LTV)
Lifetime Value (LTV) is more than a short-term metric; it captures the long-term relationship with your customer. To calculate it, multiply the average transaction value by the frequency of repeat transactions, and then multiply that by the average retention time. A high LTV indicates strong customer loyalty, allowing you some leeway in what you spend to acquire new customers.
LTV is important because not all customers are created equal. Some might make a big initial purchase but never return, while others might spend less upfront but keep coming back for years. LTV helps you sort out flash-in-the-pan customers from the ride-or-dies.
A robust LTV is a good sign—it means your customers find lasting value in your brand and are likely to stick around. But if your LTV is dropping, it’s a sign you need to invest in customer retention and perhaps reconsider your value proposition. It’s about striking the right balance between attracting new customers and keeping the ones you already have.
- Formula: LTV = Average Value of a Sale (AVS) x Number of Repeat Transactions (NRT) x Average Customer Retention Time (ACRT)
Metric #4: Average Order Value (AOV)
Average Order Value (AOV) tells you how much money customers spend each time they make a purchase. It’s like knowing what’s in your friends’ shopping carts—it gives you the inside scoop on their spending habits. Divide your total cash gain by the number of shopping sprees to get the digits. So, why care? If your AOV is up there, you’re not just a window display; you’re practically the entire store. Maybe your “Buy One, Get One” game is on point, or people just can’t resist adding just one more thing at checkout.
But here’s the problem: sky-high AOV isn’t your golden ticket. Overprice, and you might be waving goodbye to your budget-savvy customers. On the flip side, a low AOV is like having quick cash with no lasting impact.
Here’s the deal: AOV is your strategic compass. It guides you in fine-tuning your pricing, creating killer promos, and bundling just right to maximize profits. Think of AOV as your retail strategy guru, helping you achieve peak performance without spooking the cautious spenders.
- Formula: AOV = Total Revenue (TR) / Number of Orders (NO)
Metric #5: Incremental ROAS
Incremental ROAS is the sophisticated cousin to basic ROAS; it offers a more nuanced look at your advertising impact. Instead of just highlighting revenue, it zeroes in on the sales directly attributed to your ad campaign. To get this insight, you compare sales among those who viewed your ad to those who didn’t, allowing you to pinpoint your ad’s true contribution.
A nuanced approach helps distinguish whether your ads are genuinely effective or just backup singers to other channels. For example, if you’re running both email campaigns and ads, incremental ROAS will tell you which strategy is truly your headliner act. Though it demands more effort to calculate, incremental ROAS is your VIP pass for allocating your advertising budget for maximum impact.
- Formula: IR = Total Revenue (TR) / Ad Spend (AS)
The bigger picture: Beyond ROAS
ROAS may be the opening act, but it’s hardly the main event—think of it as the Jonas Brothers before they went solo. For a comprehensive view, you need to consider other metrics like CAC and LTV. Think of CAC as your admission fee and LTV as your VIP experience. Metrics like these take center stage, offering insights beyond what ROAS can provide.
Achieving success in marketing isn’t a one metric show. To fully comprehend your marketing performance, you must consider a variety of benchmarks. If you’re uncertain about which targets to aim for, let’s have a discussion. Identifying the right benchmarks can dramatically shift your strategy, resulting in campaigns that aren’t just short-term attractions but long-term commitments. It’s time to move beyond a narrow focus on ROAS and aim for a comprehensive marketing strategy.
Want to learn more about metrics that matter? Check out our guide on Why Incrementality Matters.
