Moving Beyond ROAS and Embracing Value
Let’s focus on the elephant in the room here, ROAS… or MER. These are the measure de jour for ad agencies, media buyers, and CMOs around the world. However, ROAS is highly flawed and to start making progress, we need to debunk it quickly and then move to value.
ROAS = AOV/CPA
The problem here is that AOV is not controllable by any ad. No ad has the ability to control how much money any customer spends. Someone could potentially spend between $20 to $2000 during any transaction. Because of our lack to control over half of the equation, the output, ROAS has very little ability to drive decision-making. Also, ROAS does NOT account for cash flow, operating costs, reoccurring revenue, refunds, or lifetime value.
MER is just ROAS across a whole business, but it is still just a report card of 1 space in time, with no context.
The other thing we need to appreciate is that making a sale is by no means the same as acquiring a customer. This is vital because we cannot extrapolate ROAS in relation to LTV, because the total revenue of any time period is based on a volatile mix of repeat purchases, new customers and 1-time sales.