In recent years, there’s been a push for Return On Ad Spend (ROAS) to be the main metric that media buyers and store owners should follow when advertising. It makes sense—why would a company invest more money into marketing if they’re not getting the proper return on ad spend? While that metric does help, today I’ll be discussing three main reasons why optimizing for ROAS is very shortsighted and how optimizing for Cost Per Acquisition (CPA) is easier, more beneficial, and more scalable.
CPA Is a More Reliable Metric
Everyone with some advertising experience knows that Facebook’s ad attribution algorithm has over reported results to its platform in recent years. This means that no matter where the purchase came from, if the user saw an ad from Facebook at some point and converted, Facebook counted that person’s conversion and attributed it to their efforts. While this was great for stores and brands doing relatively low volume (anywhere between 20-50k), it’s definitely an issue when you try to scale beyond that point. Now that iOS 14.5-6 has kicked in and over reporting is gone, many store owners will have to face Facebook’s harsh reality.
Now, why am I bringing this up? It’s to preface the nature of Facebook’s reporting, because many people looking at Facebook’s reporting dashboard treat it as gospel, and Zuck can’t be wrong. If you’re in that situation, you’re in trouble. ROAS post iOS14 is never going to be the same and is as unreliable as an 80s Italian sports car.
So, what can you do about this issue? Instead of going through and trying to figure out how to “prop up” your ROAS, you can begin peeling back some of the layers behind your business, products, and COGS (cost of goods sold). Then you’ll see what margins you have to play with to determine what is a reasonable cost per acquisition that you’re willing to pay to get a customer. This way, you can see exactly how much you can tolerate spending and set that as your north star to follow while scaling. Worst case scenario, you can test out a week on/off running ads and see how it impacts your sales. If it’s significant, then FB was a good foundation behind your business and conversions are just under reported. If not, then maybe you should reconsider your ads strategy.
Since ROAS is unreliable, and we know that ROAS is directly correlated to the AOV or the OV of the specific conversion tracked by Facebook, you’ll notice that the order value fluctuates significantly and unpredictably. This is exacerbated when you try to scale your campaigns—trying to have a “specific ROAS” just won’t work. The ROAS will inevitably drop as you scale, but you can control it, pushing buttons and pulling levers in marketing and operations like I mentioned in the second reason.
But that’s beside the point—as you scale your campaigns that reach $500-$1,000/day in ad spend, you’ll hit a new, more mainstream audience pocket, and this audience AOV is only $40 (vs your small pocket being $60). In this scenario, you can’t scale anymore because your ROAS is taking a hit. Whereas with CPA, you can run it back with an offer that has an AOV of $60 and test it. If it doesn’t work, keep trying at it with new offers/messaging/creative until you do succeed, and then you’ll be able to scale based on your predetermined CPA.
Lastly, now that you know your CPA on one advertising platform, you can easily replicate similar results on different platforms and maybe even get a lower CPA there (depending on the audience, of course). Since you already know to optimize for CPA instead of trying to figure out that platform’s ROAS calculations, you can expand to other channels. This doesn’t mean paid acquisition, this means doing PR, writing blog posts, having a robust affiliate network, etc. It all adds up to revenue, and if you can have a well oiled system at a consistent CPA, that’s how you scale to a million dollar brand.
While optimizing for ROAS may be working for you now, the days of its usefulness are numbered. Switching your focus to CPA not only provides you with a much more reliable metric, but is also both easier to work with and makes scaling your business a breeze. Remember: having a solid, scalable CPA is actually what’s going to drive your brand’s numbers up!