Your ROAS looks good – but is it actually driving growth?

An ecommerce company hires your PPC agency to test paid search. It follows a strict process, and after approval, the campaigns go live. Soon, you see stellar results: high conversion volumes and healthy ROAS.

Clearly, the strategy is a resounding success.

But look closely.

Some of these conversions may have happened through direct or organic search – meaning the campaigns may not be driving real growth. Often, this goes disproportionately.

To really understand performance, you need to look at the leverage and ROAS margin.

The truth about ROAS

Maybe you’ve heard of the paid eBay search test? They were spending a lot of money on PPC product ads. They then conduct a controlled trial, blocking those ads on a subset of users to measure the impact.

Organic traffic accounted for most of those changes, with little impact on revenue. But guess what? Despite the obvious results, eBay has also turned on branded ads. Fear, or smart? Tell me.

As search becomes increasingly automated, and the customer journey spans more areas than ever before, placing conversions in the right channels is harder than ever. Advertising platforms are quick to claim credit for this conversion, but I hesitate.

What most forums report is that return, not lift, is the cause. In other words, ROAS tells you how much revenue the platform is contributing; it doesn’t tell you how much of that revenue would have happened without ads.

When it comes to black box automation like Performance Max and Advantage+, the platforms have been very good at one thing: finding a way of least resistance to change. They don’t really get new customers. They often turn out to be the most expensive touchpoint on a journey that is already planned for conversion.

Without scaling up, automation simply amplifies non-upload signals, such as:

• Product search campaigns that capture existing demand.
• Retargeting campaigns that hit users who were seconds away from making a purchase.
• Reporting that makes “safe” channels seem more important than they really are.

Dig deep: Paid media efficiency: How to cut waste and improve ROAS

Increase is causal increase – what has changed since the campaign was in place, usually measured by comparing exposed groups with intervention or control groups. So what exactly drove this campaign that wouldn’t have happened otherwise?

Even if you don’t want to admit it, this is a much more useful lens for budget allocation than the platform component alone.

A channel can have a great platform ROAS and still generate a weak incremental impact. Why? Because it may be a demand for harvest rather than creation.

If you want to know if a campaign has actually driven growth, the better question is scale.

But it is still not a full answer.

In order to decide what to do next, you also need ROAS on the side.

Dig deep: Why reach is the only metric that proves true marketing impact

Marginal ROAS tells you what to do next

The channel can grow. But that doesn’t tell you where the next $10,000 should go. That’s a side ROAS question.

Minimum ROAS measures the return on the next unit of spend, not the average return on all spend. Here’s how it works: the first phase of the budget usually does well, then the next one does worse.

Go ahead, and the final dollars are dramatically less than the average proposal. The same applies to CPA metrics: the aggregate CPA may look acceptable, while the final dollars spent were more effective, leaving many advertisers bidding beyond what they should.

Assume you spend $10,000 and generate $50,000 in revenue (500% ROAS). You decide to scale and spend another $5,000. This additional spend only generates $5,000 in additional income.

• Your new ROAS estimate: 366%
• Your marginal ROAS: 100% (You actually traded $1 for $1.)

In this case, the last $5,000 you spent was completely wasted, even though the total “average” performance still looks decent on your dashboard.

This is the trap of average ROAS. It makes the channel look good if it can work well at low spending levels, and it hides the difference between a profitable main capture and a weak expansion.

To make better decisions, you need to look elsewhere. Platform ROAS helps with in-platform optimization, lift shows that campaigns really created value, and margin ROAS tells you where more budget should be going.

A strong ROAS can indicate true efficiency, or it can mean that the platform is capturing demand that would otherwise have changed. This is why you should focus more on growth testing.

Don’t ask if the channel worked properly. Ask if the next dollar is good enough — that’s what determines smart measurement.

Dive deeper: The marketing measurement flywheel: A 4-step framework for proving impact

Growth assessment options

You don’t need a full lab scale before you start. Geo-censoring, withholding, audience exclusions, and managed discounting can all teach you more than another month of debates.

• Geo-split test: Divide your markets into two groups of similar areas, keep your ads running in the “test” group, and disable them in the “control” group. The difference in total revenue between the two regions shows the actual increase in your ads.
• Search for lift tests (holdouts): Use platform tools to create holdout groups, the small percentage of users who aren’t intentionally shown your ads. By comparing their behavior with the exposed group, you can see the direct impact (for example) of your Search or YouTube campaigns.

Apart from this, you can also test the impact of remarketing, branding, awareness campaigns, or additional social channels.

Real change: From performance reporting to revenue allocation

Too many marketing teams still use metrics to explain what happened. A better use of measurement is to decide what should happen next.

Increases help you understand if a channel has created value. Marginal ROAS helps you understand that additional investment is justified. Together, they move marketing measurement out of the reporting function and into financial allocation.

ROAS tells you who gets the credit. Ascension tells you what really moved. Marginal ROAS tells you where the next budget should go. But be careful: climbing is not the same as explaining. Attribution tells you who, or which channel, should get the credit, while attribution shows you whether it was profitable or not.

Dive deep: How to take your marketing strategy from crawling to running