What is the goal of an ad campaign?
Is it to get the highest return on ad spend (ROAS) possible?
Not always.
In this post, I want to explain why a 10x ROAS is usually a bad thing.
This misunderstanding can have a huge impact on a business, so even if you don’t deal with ads directly, I highly recommend you read this article.
What do you bench ROAS?
At Smart Marketer, we share a ton of Facebook ads case studies (like this one) from our Agency clients as well as from our own businesses.
And sometimes, people in our community see these case studies and notice that some of our campaigns only have about a 1x ROAS.
Meanwhile, an ad guru they saw on Instagram just shared an ad campaign with a
10x ROAS.
So understandably, these people think, “Why should I believe that you guys know what you’re talking about? Your return is so low!”
But here’s the thing: 10x ROAS isn’t always a good thing.
In fact, if we showed one of our agency clients a campaign that was bringing in a 10x ROAS, they’d probably get mad at us.
Here’s why.
Why I don’t love ROAS as a metric.
The trouble with ROAS as a metric — and the reason why I don’t love using it — is that it doesn’t communicate volume.
Okay, you got 10x ROAS on your ad campaign. What segment of traffic were you targeting? How many customers did it convert?
Variables like these will affect what your ROAS should be for a specific campaign.
For example:
- Your remarketing ads might be around 2–4x
- And your loyalty ads might be around 3–6x
That’s because these ads are targeting specific and finite audiences that have shown high intent, so it makes sense that you’d have a higher ROAS.
But you wouldn’t want a ROAS that high when targeting cold traffic.
Why cold traffic campaigns shouldn’t hit 10x ROAS.
At Smart Marketer, the majority of the campaigns we share in our case studies are to cold traffic.
That’s because these are some of the most important campaigns you can run for your business, since this is where you create awareness for your brand and bring new customers in the door.
These are also campaigns that need to scale.
And forget about 10x — if I see a cold traffic campaign that has even a 2x ROAS, my first assumption is that it isn’t scaling enough.
A cold traffic campaign at scale should be spending tens of thousands of dollars a day.
And when you’re out there being aggressive and finding as many customers as you can, you simply don’t see ROAS numbers that high.
Why do you want to prioritize scale over profit? Let me explain.
When your ad campaigns should prioritize scale over profit.
Would you rather:
- Convert 5 customers at a higher ROAS, or…
- Convert 100 customers at a lower ROAS?
The answer: most brands would want 100 customers, and this goes back to what I said about the problem with ROAS — it doesn’t show scale.
When some media buyers (like our theoretical IG ad guru) run their campaigns, they don’t want ROAS to drop because it means they’re making less profit.
And that’s true — the campaign would make less profit, but it would also acquire more customers.
And as you start to get more sophisticated with your marketing, you realize that these initial acquisition sales are just one part of the game.
Most businesses make the bulk of their profit on the backend, and by acquiring more customers, you have more people in your community that you can monetize and profit from over time.
So when you consider the long game, it makes sense to spend more to acquire customers instead of fixating on profit.
But that doesn’t mean you can completely ignore your ROAS.
What Dictates Your Target ROAS
How much you’re willing to spend to acquire a customer (i.e., your acceptable ROAS) will depend on a handful of things.
But essentially, ROAS at the top of the funnel is dictated by your:
- Repeat purchase rate
- And customer lifetime value (or your customer value velocity, if you want to get nerdy with it)
If you’re selling a big ticket item — a fire pit, let’s say — then your repeat purchase rate is probably really low, like 5%.
In this case, you’d need a higher ROAS at the top of the funnel, because these sales represent the majority of the revenue you will ever generate from these customers, so you want to maximize profit at this stage.
On the other hand, take a business like BOOM! that sells pro-age makeup and skincare — i.e., low ticket consumables.
We have close to a 50% repeat purchase rate and a really high customer lifetime value, so it’s not as important to have a high ROAS at the top of the funnel.
We know that if we can acquire customers at around break even, we’ll still make tons of profit over our customers’ lifetimes through:
- Relationship building
- Monetization
- And order value optimization
And by being aggressive with our acquisition, we’re able to increase our market share and grab these customers before our competitors do.
Summary
So to recap: the next time you see someone on Instagram bragging about their 10x ROAS, feel free to give them the benefit of the doubt. They might be running that cold traffic campaign at scale…
But probably not.
And it’s better to run campaigns at scale than to fixate on profit, because the more customers you acquire the more market share you take, and the more revenue you can generate on the backend.
But this strategy does require you to understand your numbers — like your profit margin, repeat customer rate, and customer lifetime value…
As well as how to build relationships with customers and monetize them over time.
This article was inspired by a conversation that Ezra Firestone and I had on the Smart Marketer Podcast.
If you want to check it out, it’s Episode 129: When (And Why) “Low” ROAS Numbers Are A Good Thing.
Thanks for reading!
