Determining Your Target ROAS

Introduction to Key Metrics

Return on Ad Spend (ROAS) is a crucial metric in paid advertising, but it's often confused with the Marketing Efficiency Ratio (MER), or "blended ROAS," which encompasses the entire business's advertising performance. Most marketing organizations track these two metrics separately: the specific ROAS for paid advertising campaigns and the overall MER for the entire business. It's important to clarify which ROAS number you are referring to when discussing with your team!

The Impact of Platform Limitations

With the changes introduced in iOS 14, attributing results solely to the platforms where ads are run, like Facebook or Google Ads Manager, has become more challenging. Much of the demand generated by paid advertisements now occurs "off-platform." This shift highlights the importance of not only monitoring your channel-specific ROAS but also keeping an eye on your blended MER to ensure it aligns well with your paid ROAS.

Setting Realistic Targets

When aiming for a specific ROAS, such as 4x, it's crucial to understand the context. Achieving a 4x blended MER across your business is definitely possible. However, reaching a 4x ROAS directly within a specific ad channel, particularly for a new brand or a new campaign, is quite rare. Most e-commerce brands find their directly attributable paid ROAS typically ranges from 2.2 to 3.2, excluding Google Search which should be treated differently due to the higher ROAS stemming from branded search and performance max.

Strategic Questions for Sustainable Growth

Instead of fixating on a specific ROAS figure, it's more beneficial to ask strategic questions about customer acquisition using a bottoms-up approach:

• How profitable do we want our business to be as we scale?

• Given our product’s average order value (AOV), repeat purchase rate, and margin profile, what contribution margin should we target for new customers?

• What MER does that target translate into for our entire business?

• What channel-specific ROAS numbers for Meta, TikTok etc. generate that MER on a blended basis?

These questions lead to a more realistic target ROAS that aligns with your business goals and avoids potential misunderstandings.

Practical Example: Calculating Target MER and ROAS

Consider an e-commerce business aiming for a 20% contribution margin. If the product has a gross margin of 68% and an AOV of $40, you can afford to spend 48% of each purchase on marketing to maintain that 20% margin. This calculation (AOV of $40 multiplied by 0.48) gives a target Customer Acquisition Cost (CAC) of $19.20. Dividing the AOV by this CAC results in a target MER of 2.08.

Over time, understanding what specific ROAS figures are necessary to achieve this MER will guide your marketing strategies and help set achievable, channel-specific ROAS targets. For example, perhaps a 1.8 ROAS on Meta generates a 2.08 MER for your business, because Meta is generating a lot of demand that may be attributed to other channels like organic, direct traffic, or gogole s

Conclusion

By distinguishing between ROAS and MER and understanding their implications, marketers can set more informed and effective advertising strategies. It's not just about hitting a high ROAS in one channel but ensuring overall marketing efficiency and business profitability through thoughtful analysis and strategic planning.