Why ROAS Sucks As a KPI

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ROAS (Return on Ad Spend) is the industry standard for assessing and reporting the performance of paid digital campaigns, but it really sucks as a KPI.

To be totally fair, ROAS has a few strengths. It is easy to calculate (even easier than ROI): Revenue / Ad Spend. It is a relatively clear measure of efficiency. It is a metric that can be used across channels and media. But that’s about it, and when you start digging in, ROAS has a lot of limitations, including one huge killer that makes it, well, dangerous:

You can go out of business optimizing to ROAS.

And that is where ROAS really comes into its own as a sucky KPI. Frankly, I want KPIs that align with the financial health of my business and I certainly want that alignment in KPIs used for assessing campaigns we run for clients. ROAS doesn’t do that. ROAS is an efficiency metric. It has very little to do with how much money you make. This is because (like ROI) it is only a good metric when comparing exactly the same media spend. The problem is, nobody does that.

When you look at marketing reports across the industry, you will almost always see ROAS as a standard KPI, even when marketing spend changes.  And this is where the danger part comes in. ROAS works as a comparison of efficiency, and not magnitude.  An ROAS of 6 is more efficient than an ROAS of 5, but that doesn’t mean you made more money (or any money, but I will get to that). An ROAS of 6 on $10 did not make you more money than an ROAS of 5 on $10,000,000. That is a fairly obvious example, but marketers often treat ROAS as a KPI in isolation, which means you can easily reduce the magnitude of returns in the search for higher efficiency. Google even allows campaigns to use ROAS as a target for bid optimization, regardless of the effects on magnitude. Ponder that for a moment. And while it seems crazy, we have seen marketers make the decision to optimize for ROAS, opting for efficient returns even when the magnitude wasn’t enough to make payroll and keep the lights on.

Which brings us to the second danger with ROAS which is that it is based on top-line revenue, and not profit. This is why you can have positive (>1) ROAS and still lose money. This can happen when the efficiency of the return isn’t enough to cover costs. Unfortunately, many marketers aren’t given deep enough financial information to know whether campaigns are profitable or not. They just have this one metric which will only ever tell them if campaigns are so grossly inefficient that they aren’t even covering revenue. Again, I want metrics that alert us when we are even slightly less profitable, and not just when the bus is so far off the road that it is lying at the bottom of the canyon.

So what’s a good metric? Total post-marketing profit (aka Contribution Margin), which I will cover in an upcoming post.

5 Marketing Data Mistakes Most Companies Make

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Even the most data-savvy of marketing teams can make mistakes in thinking about the use of data in optimizing campaigns for financial success. Let’s face it, marketing data is rife with issues and is never perfect, and it is easy to put on blinders based on the data you have available, the systems you use, the marketing channels you work with, or even the directives of senior executives. Despite that, everyone wants to be able to connect the dots from ad impression to profit. Here are a few common data traps we see even smart companies easily fall into. How do you rank on this list?

1. Using Average Value CPA Targets

Cost-Per-Acqusition targets are fertile ground for data issues. For example, are your targets even based on customer value, or are they merely a “seems reasonable” guess? Smart data-centric companies will base target CPAs on actual customer value to ensure that their marketing programs don’t risk over-paying for customer acquisition. However, even smart companies can fall into using a single average CPA target for all their customers. In doing so, they underpay for audiences that provide higher-than-average value customers and overpay for low-value customers. Companies can avoid this by using targets tied to segmented customer values, not averages.

2. Using Last-Click Attribution

The attribution question has long been mired in a false discussion of “who gets credit?” when there is more than one user touch leading to a sale or lead. Some companies still use last-click attribution, often in a mistaken belief that this is somehow a “truer” view of acquisition, or that it just allows them to avoid thinking about attribution at all. Google hasn’t made things easier by offering multiple views of attribution with little guidance on when and where the different options should be used. Here is our take: Avoid last-click attribution at all costs unless you are evaluating retargeting assists. Last-click attribution will severely over-inflate your brand and direct numbers and cloud your ability to see high-value first-mover channels.

3. Not Considering Out-Of-Channel Effects

Everyone looks at their channel-specific numbers, but an astonishingly few companies continually examine their direct and brand channels, looking for influence from other areas. While everyone logically understands that users did not wake up with magical knowledge of a company’s brand, it often feels like that’s the assumption of marketing teams who put on “channel blinders” when evaluating their programs. Smart companies view their data holistically, looking for out-of-channel trends that increase or decrease direct and brand engagement. While only 5% of users in a typical search campaign are likely to bounce over to direct or brand, it is not unusual for a whopping 50%-90% of sales from social media or display campaigns to come through direct or brand traffic.

4. Over-Valuing Metrics Not Tied to Revenue

What is the value of a Like? Most data-driven marketers have moved on from directly equating social media engagement as revenue-related events, but many metrics that don’t correlate well to revenue are still held as sacred cows. Any metric used for campaign optimization should be well understood in how it relates to revenue before it becomes a key KPI. Data-driven marketers with their eyes on the profit prize quickly realize that Time-On-Site, Impression Share, Cost-Per-Click, or other common metrics are not as tightly aligned with profit as they might think when other factors such as volume, customer value, out-of-channel influence, or profit margin are taken into account. Easy rule of thumb: Use post-marketing profit as your marketing KPI.

5. Assuming Traffic Equals Sales

We’re two decades into the digital revolution, and it’s still incredibly common for people to assume that eyeballs equal profit. Back in the days of traditional media the best shot you could make in media buying was the most eyeballs for the lowest cost. That approach doesn’t work in digital because of the competitive auctions, and yet “Let’s get more traffic to this page/product/site” is not at all an uncommon marching order, particularly from executives who don’t understand the auction effects in digital media buying. Smart data-driven marketers know that their job is as much about when NOT to buy traffic as it is in finding the areas of success, and continually evaluating how to increase the quality of an audience by peeling away the “eyeballs” that are not their target audience. This allows them to compete more aggressively in the auctions while protecting the bottom line. Sometimes less really is more.

These are samples of marketing data traps that are very easy to find in almost any campaign. Most of these issues can be avoided through three core practices: 1) By adhering to a holistic financial lens in optimizing the entire marketing program against financial targets; 2) By working backwards through the path that led from advertising to revenue and; 3) By not ignoring revenue that falls outside of the “channel buckets”.

The Seductive Danger of Impression Share

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Advertising is all about targeting, right? And once you’ve found a targeted audience, you want to get your ads in front of all of that audience. This is the thought process behind Impression Share, that often elusive, seemingly golden metric that Google dangles before us in AdWords reporting.

And why wouldn’t Impression Share be important? You certainly don’t want to cede valuable targeted eyeballs to your competitors, do you? Why, that would be leaving money on the table, so the higher Impression Share the better!

Not so fast.

As we continue our decade-and-a-half long transition from negotiated media buying to auction-based media, it’s worth taking a second look at Impression Share, as nothing may be quite so seductive, or quite so dangerous in our everyday marketing metrics.

Impression Share is an easily understood metric. What percentage of the available audience were you able to put your ads in front of? Impression Share measures exposure as the percentage you successfully marketed to. Simple.

The problem is that, unlike negotiated media where delivered impressions are specifically negotiated (with a make-good period typical when there is a shortfall), in the auctions it usually takes higher bids to capture that elusive missing percentage of Impression Share. That incremental cost may not be worth it. In fact, going after higher Impression Share may cause you to take a profitable campaign into unprofitability.

This is because successful auction-based advertising is performed by knowing how much to pay for advertising relative to the value of the revenue generated by that investment. Unlike the old school media buying paradigm of the most-eyeballs-for-the-lowest-cost, auction-based media is hyper-targeted, competitive, and dynamic. One of the best results of knowing what to pay for advertising is knowing what not to pay.

Which brings us back to Impression Share. If you are getting 100% Impression Share on a wide variety of keywords, chances are you are paying too much. It’s rare for a company to be able to monetize traffic so well that ad positions that garner 100% Impression Share are profitable across the board.

So, what good is Impression Share? If you are optimizing a campaign using value-based segmentation and value-based bidding (as you should be), Impression Share is a great metric for understanding the untapped opportunity available, if conditions change to allow for better monetization. This can happen through focused conversion improvement testing, or speaking to higher-than-average value customers. However you improve the math of conversion, the untapped Impression Share gives a sense of the size of the additional audience that may be out there.

If Impression Share is so dangerous, why does Google promote it? The answer is probably obvious. The only one who always wins the Google auctions is Google. Impression Share promotes tactics that get Google more advertising dollars. But used correctly, Impression Share can be a helpful metric to gauge an additional available audience, but one that can only be tapped into if you can get the math of cost -> conversion -> value to work.

7 Easy Steps to Improve Your Retargeting

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Here are seven quick adjustments you can make to take your retargeting program from “Yuck!” to “Yay!” (Listen up all of you who just use default settings and one giant bucket of targeted visitors, and don’t skip the last point below.)

1) Frequency Caps

Overexposure to ads can quickly annoy visitors and result in decreased campaign performance. Limit the number of times a tagged visitor is exposed to your ad. Understand your sales cycle and take into account how frequently you want visitors to see your ad within that time frame.

2) Audience Segmentation

Visitors arrive with different goals and needs. Are they a customer? A prospect? What content have they viewed, and how does that help define their needs? Target messaging in ads to different stages of the funnel. Keep ads relevant to the audience segment.

3) Use One Provider (to start)

Many retargeting providers, such as Google AdWords, AdRoll, Steelhouse, and Perfect Audience have a high level of overlap in their publisher network.  Use one out of the gate to avoid dilution, then add unique publisher networks as your program grows and becomes more sophisticated.  Start with a network that provides a broad reach and good feature support, such as frequency capping.

4) A/B Testing

As with all aspects of digital marketing, retargeting offers a fantastic opportunity to improve your engagement numbers through ad testing.  Ideally, optimize to increased conversions.

 5) Use Targeting Options

Many retargeting networks offer sophisticated add on targeting for geography, context, demographics, or more. If these help you better focus your retargeting spend on the audience that will most likely bring you value, you should be using them.

6) Switch Up Messaging

Many marketers reiterate messaging in their retargeting ads.  But retargeted ads are also an opportunity to say something different.  Perhaps the reason the prospect didn’t convert in the first place was that the key piece of your value proposition for that person was missing in their experience on the site.  A/B testing different ads that have different value propositions is a powerful one-two punch, and a path to success.

7) Evaluate Correctly

Repeat after me: “Retargeting is not a Channel”.  Unlike other media, retargeting only works as an add-on cost that pays for itself by increasing conversion rate.  Without your other channels, retargeting cannot exist.  Yet companies still commonly report on retargeting performance with channel-based metrics, such as a unique cost-per-action.  The right metric is cost-per-assist, and this can only be evaluated in terms of overall cost of acquisition and conversion rate. Thinking clearly about how to evaluate retargeting is key to success, as the increased use of retargeting is quickly increasing the cost and competition in the display networks.

Retargeting is quickly moving through its awkward adolescence as marketers begin to understand user behavior and find tactics that work for them.  Keep trying new ideas and you too will find that retargeting becomes a key piece of your digital marketing program.

Soren Ryherd @ Conversion Conference 2016 – Las Vegas

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Join Soren Ryherd at Conversion Conference 2016 in Las Vegas on May 18th when he presents “Beyond Clicks: The New Math of Optimizing for Multi-Channel Traffic”.

Soren will walk through a process for creating conversion success in digital campaigns that goes well beyond search. Backed by data and the new math of digital engagement, this presentation will provide quick and highly useful take-homes for creating conversion success from large and diverse digital campaigns.

Soren Ryherd to Speak at SMX West 2016 – Chain-Based Attribution

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Working Plant Co-Founder, Soren Ryherd, will be speaking at SMX West 2016 in San Diego on March 2nd as part of the panel on “Attribution Beyond the Last Click”. He will be discussing the merits of Chain-Based Attribution.

Panel Overview: Giving all the credit to the last click of a conversion is like saying the scorer is solely responsible for the goal. Attribution is much more accurate when factors such as in-store visits, phone calls, and offline conversion uploads are taken into account. In this session, panelists examine various attribution metrics and show you which are best for the most important things you need to measure in understanding conversions.

Soren will be joined on the panel by Dave Roth of Emergent Digital and Adam Proehl of NordicClick Interactive. The panel will be moderated by Brad Geddes of Certified Knowledge.

Attribution Lesson: Why Your Data Are Lying to You

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Your data is not telling the truth, the whole truth and nothing but the truth. Well, the tools you’re using to manage your data are likely not up to the task and as a result of that attribution issue, you’re not getting to the truth.

In his first Search Engine Land article as a monthly contributor, Soren Ryherd encourages marketers to plug value leaks, measure campaign effectiveness with a holistic view, and to embrace the Out-of-Channel engagement path to help ensure that they are correctly managing their online marketing efforts.

Read this Search Engine Land article here!

What readers had to say…

“One of the best attribution articles I’ve read in a long time. Thanks for stepping up the conversation”.

“Very interesting thought on attribution ! You’ve inspired me to start thinking in a new direction”

Why We’re Loving Pinterest Promoted Pins

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In January, Pinterest moved their paid advertising platform out of beta.  As early adopters, we were able to run tests with Promoted Pins to see if targeting, cost, and engagement could provide a meaningful channel for our clients.

It did.

In fact, Pinterest Promoted Pins has been one of the fastest growing digital channels in our history, providing high quality traffic with measurable engagement.  For at least one of our clients, Pinterest has grown to encompass over half their media buy simply because the numbers are so good.

Direct Response in Social Media?

Unlike many paid Social Media advertising programs, the visual focus and highly engaging nature of paid pins have led to performance not unlike direct response campaigns in Search and other highly-responsive media. This has meant rapid results and optimization of campaigns, which is not always the case in Social Media advertising. Where many Facebook and other Social Media campaigns may be challenging for direct response results, Pinterest can work quite well. We do note that it is early for Pinterest, and increased competition and Pinterest’s own efforts to increase bidding are likely to result in a more expensive channel in the future.

Out-Of -Channel Activity

While Pinterest provides high-quality traffic and direct engagement with Promoted Pins, it is worth noting that they also provide a high level of Out-Of-Channel activity.  Out-Of-Channel activity simply means that there is a tracking disconnect between the exposure of the paid advertising and the actual sale or other engagement of the end user.  With Pinterest, it is not at all unusual for users to see the domain name of the advertiser associated with the promoted pin, then come in through a Brand or No Referrer visit.  It is important when evaluating Pinterest campaigns that the Out-Of-Channel lift be taken into consideration, as significant value is produced through Out-Of-Channel behavior.  In tests done with online retailer Urbilis.com, we estimate Out-Of-Channel activity to be close to or more than the level of tracked sales.

Out-Of-Channel activity occurs with any online advertising, and is related to the level of interruption of the media.  Search, for example, has essentially no level of interruption and therefore low levels of Out-Of-Channel behavior.  Pinterest, due to the nature of Pins and Promoted Pins, has surprisingly low levels of interruption compared to display, video, or even other Social Media advertising. With Urbilis.com we say Out-Of-Channel behavior as approximately 50% of the total value created by Pinterest.  In display, video, or other more interruptive media this can be 90% or higher.

Reach

Pinterest Promoted Pins allowed us to reach an audience far greater than our clients’ organic Pinterest campaigns. It has not been unusual for us to find that the volume of re-pins and clicks from Pinterest can be 10x t0 100x the volume of the non-paid Pinterest campaigns. This access to a significantly larger quality audience makes Promoted Pins highly valuable for clients in many vertical markets.

Pinterest is a great example of the power in testing new media channels and programs. Digital marketing is a game of volume and math. Finding new and engagable audiences while controlling cost of customer acquisition is a key part of a robust digital program.

Soren Ryherd to Speak at SMX Milan 2015 Conference – Mad Scientists of Paid Search

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Working Plant Co-Founder, Soren Ryherd, will be speaking at SMX Milan in November!  Soren will discuss why Out-Of-Channel measurement is critical in to the success of CPA-based marketing given the high levels of out-of-channel user engagement outside of Search, as well as the increasingly common cross-device behavior seen in mobile search. 

SMX Milan will take place at the Meliá Milano hotel on Thursday and Friday November 12 & 13 2015. Please catch up with him after the session, if you plan to attend! 

What “The Next Level” Looks Like for Digital Marketing

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“We want to take our marketing to the next level.”

We hear that often. But with digital marketing becoming more complex by the minute, what does the “next level” even look like?

1. It’s Holistic

With cross-device and cross-channel behavior becoming more the norm than the exception, marketing programs that are siloed by channel are going to be increasingly inefficient. For example, Mobile ad exposure can drive desktop engagement. Video ads may well drive brand searches.  But when value created in one channel is realized in another, it creates disconnects for budgeting and performance measurement. Striving for neat and tidy single-channel performance numbers is likely detrimental for your business. Marketers who break through to the next level are looking holistically at engagement across channels, across engagement points, and over time.

2. It’s Even More Data-Driven

Data-driven reporting, or simply looking at Google Analytics reports won’t cut it any more. Data used just for creating reports is data that is being wasted. True data-driven marketing feeds core metrics from advertising, engagement tracking, and customer databases back into ongoing optimization on a daily basis. “Next-level” data will focus on supporting complex modeling with hard data from multiple sources. The days of “do, measure, done” are gone.

3. It’s Financially Rooted

If you’ve been optimizing for marketing metrics without an underlying financial model, it’s time to step it up (take notice “Time-On-Site”). Marketing at its core is a financial  investment in a financial outcome. “Next level” marketing is explicit about the financial model and how engagement and customer value support revenues and profits. To do this, Key Performance Indicators must be tightly aligned with profits.

4. It’s Predictive

The ad dollars you spent today may have no relationship to the sales you made today unless you have the world’s shortest sales cycle. Today’s sales were likely to be largely, or maybe even entirely, from past advertising.  Tomorrow’s marketing relies on predictive models that are savvy about time. An understanding of sales cycle, latency and engagement process is critical to the financial assessment and efficient optimization of your program.

5. It’s Complex

Yes, life would be easy if marketing were simple. But today’s big opportunities in Digital lie in mastering complexity. The better you are at understanding complex user behaviors and tightly optimizing those behaviors for a clearly-stated financial result, the better chance you have to beat your competition. This means understanding the limitations of your ad management tools, reporting, tracking systems, and customer data and moving beyond those limitations.

The “next level” is an exciting place. Welcome to it.