On the surface, high ROAS looks like the Holy Grail of paid ads. That angelic beacon of vitality that is 1000% ROAS, it’s what advertisers dream of. But it begs a question, why? Why is it so sought after?
To be perfectly honest, I’m not sure. High ROAS is more overhyped than fidget spinners at a mall kiosk. Sure, at first glance it looks great. I mean, who doesn’t want to spend $1 to make $10? I’ll tell you who: me. Why? Where should I begin?
Let’s start by discussing why it’s not bad, but why it can ALWAYS be better. The goal of business is to turn a profit, of course. Groundbreaking stuff here, I know. Just bear with me. What’s better than turning a profit though? Turning a lot of profit. Unfortunately for that perfect 1000% ROAS, turning a lot of profit is seldom the case. Having had the pleasure to manage and analyze accounts spending upwards of $1,000,000 per month, I can tell you this with 100% certainty: None of the champions of industry are aiming for 1000% ROAS. Not a single one. The reason being it just doesn’t make good business sense to aim for such lofty ROAS figures.
The biggest pitfall of the excessively high ROAS aim is, at least in my mind, an obvious one. You are limiting potential growth and scalability for short term, limited profit. As a business, you should always be looking ahead to ensure your footing doesn’t erode beneath your feet. Exactly that can happen quickly in scenarios where only a small portion of the market is being capitalized on. Once profitable opportunities can and will dry up due to the following:
- Competitors entering the market which can increase costs and lower Click Through Rate.
- Competitors driving up costs by bidding higher.
- Competitors having better value propositions which can reduce Click Through Rate.
- Ad platform changes which can have widespread effects.
- Changes in the economy.
- Changes in the market such as demand for specific products.
Don’t Let Fear Rule Your Decisions
As you can see, there are huge real world risks associated with this strategy that are completely out of your control. Even more so in more competitive markets. So where does that leave us? How should we proceed? Simple, we aim just over break even. The goal of advertising campaigns should not be to have a one hit wonder that will only last for a few months. The goal is to create a system which consistently brings in new customers at a rapid rate, maintains profitability, and can scale into the foreseeable future. This strategy also helps to mitigate the risks of the potential market changes above by being able to have many diverse campaigns which allow you to cast a wider net instead of being a one-trick-pony.
To really get the most out of paid advertising, you should have other systems in place in your business (great customer service, email marketing, remarketing campaigns, to name a few) to make sure customers come back time and time again.
Here’s an example:
Let’s say your business has a 30% margin of profitability. That puts our break even ROAS at 333%. In this specific instance we would identify the ideal profit range from 400%-450% ROAS. This gives us what I like to call a profit buffer zone. It’s a range that we can aim for with the account that will throw off profit but also fly close enough to the sun to get as much volume via clicks and impressions as possible. This approach also typically has the added benefit of generating a substantial number of impression and click assisted conversions which can significantly bolster the revenue generated.
Let’s say your account is currently spending $2,000 per month but has a 1000% ROAS and is bringing in $20,000 in total revenue from that $2,000 spend. On that $2,000 spend, with a 30% margin, you would bring in $4,000 profit ($6,000 profit – $2,000 ad spend) after costs on that $20,000 in revenue.
This account is probably near peak efficiency and would probably have significant difficulty scaling from this point with the same ROAS target.
If however we increased the spend to let’s say $10,000 to make $45,000 revenue (our ideal profit buffer zone), we would in that case be making $3,500 in profit ($13,500 profit – $10,000 ad spend) but have a significantly larger reach and higher volume of transactions. While our profit took a slight hit in the short term, our long term potential has now gone through the roof. We should now have many more customers being introduced to our company, which can have a bit of a snowball effect.
With the increased spend and overall visibility of the campaigns, just a few tweaks should be able to reap even more profit if needed, or what I would recommend would be to continue scaling at the current rate. This has the potential to unlock even more powerful revenue generating opportunities in the account.
Testing new campaigns and new ideas is a great way to “future proof” your accounts. By always testing you are always one step ahead of the curve and are in a much more advantageous position to capitalize on opportunities as they present themselves. By having more realistic ROAS targets for these campaigns based on your margin of profitability, tests can be run quickly and effectively so long as there is adequate budget allocated to them.
Overall, so long as your tracking is sound, operating just above break even is perhaps the fastest way to make a big impact on your account and even on your business as a whole. Not quite sure what the best approach is for your business? Reach out today and we would be happy to discuss how you can take your business to the next level.
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