A lot of our clients think they know the “North Star” target Return On Ad Spend (ROAS) and Cost Per Action (CPA) for their campaigns.
Some even define the target at a business level. For example, we often hear phrases like:
“Our Google ROAS should be more than 150% or Our paid search campaign CPA should not exceed $20.”
This is one of the biggest mistakes we see businesses make; it leads to improper marketing mix optimisation and losing money for the business.
I would say with confidence that it is technically impossible to understand ROAS/CPA at a campaign or channel level. Yes, you can apply different attribution models but all of them are wrong and none of them will show you the real ROAS/CPA of the channel or campaign.
The only ROAS/CPA you can calculate for sure is the ROAS/CPA of your whole marketing mix. And this is the only ROAS/CPA you should use as a target for your marketing mix optimisation.
Let’s take a look at a very simple example of the marketing mix where you have only three channels: Google/cpc, Google/organic, and direct/none, and the monthly statistics using the last non-direct click attribution looks the following way:
Let’s say the CFO is happy with the current results of marketing team performance. The overall ROAS of the marketing mix is 400% and it provides a good unit economy for a business.
CFO is happy with the 400% ROAS of the business. And is ready to invest as much as possible within this ROAS. This is the TRUE KPI.
Taking this information into account, an inexperienced marketing manager might say that their target ROAS for Google/cpc is 200%. But this will be completely incorrect and may lead to horrible results.
Imagine, the client connects SegmentStream and replaces pixel conversions in smart-bidding campaigns with predicted conversions. This way Google campaigns start targeting not only users that convert within the same device using cookies but also users that are likely to convert from other devices and later come as Google/organic or direct/none. The next month the client gets the following results.
Imagine a marketing manager being furious as Google/cpc ROAS drops from 200% to 180% and makes the decision to switch off SegmentStream optimisation. But what actually happened? As a reference, the marketing manager used a vanity metric of a channel ROAS, which doesn’t have anything to do with reality.
The reality is that overall marketing mix ROAS increased from 400% to 500% and optimisation helped bring $1000 of additional revenue with the same budget.
Hopefully, the team manages to educate the marketing manager and persuades them to change target ROAS for google/cpc to 180% instead of 200%. But is the marketing mix optimised? Not quite yet.
As we remember, the CFO confirmed that the marketing team can invest as much as possible as long as the ROAS of the whole marketing mix is at least 400%.
This means that we can push our target ROAS for google/cpc even lower! And after some incremental changes in a few months we might come to the following marketing mix:
This way, we increased investment into Google/cpc from $1000 to $1500. This led to a drop of google/cpc last non-direct click ROAS from 180% to 160%, whilst the overall marketing mix ROAS became 400% and overall revenue increased from $5000 to $6000.
This way, by applying proper marketing mix optimisation, we achieved $2000 revenue increase (+50% growth) while maintaining the same ROAS of the marketing mix of 400% even though google/cpc vanity ROAS metric decreased from 200% to 160%.
That’s a lot of stats! Here are the most important conclusions and key ideas for you to take away:
- Per-channel and per-campaign ROAS/CPA you see in advertising platforms or Google Analytics have nothing to do with real ROAS/CPA.
- There is no technological possibility to calculate real per-channel and per-campaign ROAS/CPA due to cookie-tracking limitations and cross-device interactions.
- The only true ROAS/CPA you can calculate is the ROAS/CPA of the whole marketing mix.
- Target ROAS and target CPA bidding strategies inside the advertising platforms should only be used as a means of budget limitation and should be revised on a monthly basis depending on the whole marketing mix performance. There is no ideal static target ROAS/CPA for the marketing campaign. Target ROAS/CPA can be decreased/increased depending on the overall marketing mix performance.