The ultimate question in paid ads is always, how effective is this marketing strategy? Am I seeing an increase in revenue from paying for brand awareness in the customer journey? For quite a while, the answer to that has been ROAS. An acronym for "return on ad spend", which sounds like it should answer this pressing question of whether the investment in paid ads is paying off. But does it? With ample experience in managing paid ads, we honestly think there's more you should know if you're feeling ROAS curious. So sit down (maybe with an iced latte for brain fuel) and let's demystify ROAS and lay out if it really matters in paid ads. After all, it's given a lot of weight, are we properly examining if it holds all the answers to how far your investment is going before giving it so much credit?
The ROAS equation is quite simple. We're looking at the immediate gains of the total amount brought in by an ad. That's then divided by the ad spend. Which, at first glance, feels like the proper guiding light for measuring how well your paid ads are working. But to use it as the only metric might be a tad disingenuous. The major issue is that ROAS tends to produce dramatic results (both negative and positive) thanks to each advertising platform (think Facebook, Google, Tiktok) who are working to make their ad hosting services look the most favourable. (For more insight into Google’s unique take on measuring ad spend, we broke it down here.)
Not only that, but ROAS, is held back by one major factor—it's unable to account for all the revenue a marketing campaign might bring to the table because it's such a narrow equation. Consumers are becoming more and more discerning with their dollars, and might see an advertisement but not purchase until later in the year. Another way this could play into inaccurate results is in a marketing funnel. If a potential customer interacts with 7 of your ads, and decides to buy on the 8th ad, ROAS would give all the credit to the final ad they see. That would make it feel like the first 7 ads were a waste of money, but in reality, they were extremely influential for the purchase. They warmed up the customer to your brand. Because of this human factor, the ROAS equation simply isn't ideal for accurate results with how far your dollar goes. (But it does make for a punchy case study on TikTok’s blog for advertisers!)
It's this limitation that's driving paid ads agencies to seek a more nuanced reporting option, so we can share accurate results with our clients. Enter, Marketing Efficiency Ratio, often called MER. MER shows the cumulative effects of your marketing efforts over time, rather than looking at immediate gains (which is what we get from ROAS). By calculating the total revenue divided by the overall ad spend, we receive a big picture analysis that gives credit where credit is due, taking into account ad campaigns that nurture and build authority, which contribute to a sale when we zoom out on a brand. The end result? A much more accurate picture of how your advertising investment pays off.
It's a beautiful, holistic way of looking at the ultimate return on marketing investment. Using MER allows you to look at the cumulative effects of your marketing efforts over time, rather than looking at immediate gains, which is what ROAS will show you.
With Facebook and Apple's tracking restrictions, such as the removal of third party cookies and opting out of sharing your information, we're now experiencing MER as the most accurate wave of reporting, and anticipate more and more weight will be given to a holistic perspective vs. individual ads.
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