Why Facebook Ads ROAS is a Misleading Metric

Today I want to share something that might be controversial. I want to talk about on of the most important metrics, the ROAS.

It's often considered a key indicator of campaign performance by media buyers, and I also agree that is a key indicator of Facebook campaign success.

However, is ROAS truly a reliable measure of success?

In this issue I explore the deceptive nature of ROAS in Facebook advertising and advocates for a more profit-centric approach to campaign analysis.

What is ROAS?

ROAS stands for Return on Advertising Spend, and it plays a crucial role in evaluating the effectiveness of your ad campaigns.

In simple terms, ROAS helps you understand how much revenue you're generating for every dollar spent on advertising.

How ROAS works

In my experience, ROAS is the key indicator when it comes to low-budget Facebook Ads because it measures consistency and gives me great indication to measure goals.

What I learnt is that in most cases ROAS becomes smaller and smaller as you increase the spend.

Why?

Well, Facebook does not have endless new users whom to show your ads and cannot simply bring new customers as you increase the reach.

Meta does not work like this.

Facebook's audience is limited, and people interested in your products & services are limited, as well.

Once you reach a certain amount of potential customers your campaign becomes un-scalable, hence ROAS will drop.

So, you have to focus on how to keep consistency with ROAS.

There are different ways to do that, such as increase your AOV (Average Order Value), get customers to come back, loyalty programs etc.

But this is a topic for another WAC issue.

Let's get back to our problem.

The Problem with ROAS: A Case Study

Let's break it down how ROAS can be misleading.

Imagine you are running two different ad campaigns on Facebook: Campaign A and Campaign B.

In Campaign A, you spent €300 on ads and generated €900 in revenue, resulting in a ROAS of 3.

On the other hand, Campaign B had an ad spend of €3000 with revenue of €5400, leading to a ROAS of 1.8.

Now, here's where it gets interesting.

While Campaign A might seem more successful based on its ROAS of 3 compared to 1.8 for Campaign B, the real question we should be asking ourselves is: 

Which campaign is more profitable?

At the end of the day, what truly matters is the profit you are making.

I'd choose the campaign that generates more profit, regardless of the ROAS value.

In this case, campaign B, generated €2400 revenue compared to campaign A, which amounted to €600.

That's 4x more revenue! And probably the business keeps more profit from €2400 than €600 revenue.

So, would you spend 10 times more on ads to get these results?

It depends on your business type and profit margin.

One important thing I have to mention is that campaign A is not scalable, meaning that if you increase the spend, the ROAS drops dramatically.

However, campaign B is scalable, meaning you can spend more and keep the ROAS at around the same level.

How do you know if a campaign is scalable or not?

Well, it could be multiple reasons for not scaling:

• The product/service is not scalable

• The audience is limited

• The business is regional and has a small market

• The product/service is seasonal

• There is a maximum for your service (flight seats, hotel rooms)

TL;DR - Why ROAS is could be misleading

Understanding true profitability: ROAS may indicate a high return on ad spend, but it doesn't consider the costs involved in delivering the product or service.

By focusing on profit, we get a clearer picture of the actual revenue left after deducting all expenses.

Long-term sustainability: Maximizing ROAS might drive short-term revenue, but it's not a sustainable strategy if it doesn't translate into substantial profits.

Prioritizing profit ensures that the campaign contributes positively to the overall business sustainability.

Resource allocation: By evaluating campaigns based on profit, you can allocate resources more efficiently.

Identifying which campaigns are generating more profit, you can allocate spend more adequately.

Conclusion

When evaluating the success of a campaign, it's vital to consider the metric that directly impacts a business's bottom line – profit.

Many marketers often focus solely on ROAS as a key metric without considering the profitability aspect of their campaigns.

When it comes to evaluating the performance of ad campaigns, it's essential to look beyond just ROAS and shift the focus to profit.

While ROAS provides insights into revenue generation relative to ad spend, it doesn't necessarily reflect the true impact on the bottom line.

Do you have any examples where a business might spend more on ads to get a lower but steady ROAS?