Sep 06, 2023 12:00AM
Evaluating only ROAS can mislead. A protein shake's immediate 1X ROAS masks its true 5X when considering repeat buys. Always factor in a customer's lifetime value. Thanks, Joe.
Focusing just on reported ROAS or ACoS can lead you down the wrong path.
A quick example…
Say I sell a protein shake pack that costs $20. Let’s say it costs me $20 in advertising spend to drive a sale for a customer that is new to my brand.
Once someone purchases the first pack from me, some customers don’t purchase again but others will purchase quite a few more times. On average, a new customer will order my product 4 more times next year.
Let’s start with the reported ROAS of this campaign. Advertising sales metrics will just be attributed back to the first sale made so my reported ROAS will be:
Reported ROAS = Ad Sales / Ad Spend = $20 / $20 = 1X ROAS (or 100% ACoS)
However, if we include the lifetime value of the client, the numbers look a lot different. Instead of just including the first purchase in our ad sales calculation, let’s include the additional four purchases.
Actual ROAS = Lifetime value from Ad Sales / Ad Spend = ($20 x 5) / $20 = 5X ROAS (or 20% ACoS)
If we just used the reported ROAS to direct our decision, we may have shut down the campaign. However, when we take into account the lifetime value, the campaign could be highly profitable.
High level: If you have a consumable product or a brand that receives a lot of cross purchases, make sure you take the lifetime value of a customer into account in your advertising metrics.