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November 22, 2017

From CTR – ROAS – The exciting world of marketing acronyms explained

The world of digital marketing may be a fairly established part of most businesses lives however in the grand scheme of things – it hasn’t been around for long at all. The first online banner advert was shown on the 27th of October, 1994 – in the subsequent 23 years a lot has changed. Online marketing now far outweighs offline marketing and we’ve all shifted from platform to platform chasing new and fresh audiences, thinking up new and interesting ways of capturing people’s attention and ultimately selling them something.

Ours is a young industry, a nimble one and a dynamic one – but that doesn’t stop it being as extremely slow to react to changes. One such change and the subject of this post is the change in metrics that we all use to measure our campaigns – and despite that sounding like the most mundane of subjects, it’s actually fundamental to the viability of the industry.

For years we were all obsessed with CTR (Click Through Rate), essentially the % of people who click on your advert having been shown it – this seemed like the key stat because ultimately that shows us how good the ad is right? However – that does take into account a lot of factors such as audience, platform, device, accidental clicks and so on.

Next came along CPC (Cost Per Click), largely driven by the Google Adwords emergence and ensuing dominance. It suddenly made sense to measure how much it is actually costing a business to get people to a website – because that is the point of the ads surely, to get people to divert from what they were doing and to pay attention to what we have to offer as a business. It was then up to our website to take it from there, to sell them the brand/vision/product/service and ‘convert’ the prospective customer.

The flaw in this stat in isolation is that this would lead us to hunting for ‘cheap’ or low quality traffic – there is plenty of that out there, and it won’t get you anywhere. Focusing on CPC will most likely lead to a site flooded with irrelevant people who result in a very low conversion rate and thus return.

For the past five or so years, the focus has been all about ‘CPA’ (Cost Per Acquisition). This made sense after the learnings of CPC. CPA at least measured the cost of capturing someone’s attention, making them click on an ad, go to the website and then make a purchase. A business could suddenly have an idea of how much it actually cost to sell a product and could consequently work out some very useful figures:

Gross Profit = Gross Revenue – CPA.

Over the past year however the tide has turned on CPA. Suddenly looking at a single ‘A’ didn’t seem to make sense. Most businesses sell a range of products at different prices. Take a footwear business as an example – they can sell everything from a £3.00 pair of shoelaces to a £200 pair of shoes. A £20 CPA sounds great if you’ve sold a £200 pair of shoes, but not so good if you’ve sold them a pair of shoelaces. Dealing with each purchase as the same quickly seems flawed.

So now we have reached the age of ‘ROAS’ (Return On Advertising Spend). What does this mean? Essentially what multiple of my marketing budget have I returned in revenue. If I spend £1,000 on marketing and drive £3,000 in sales – my ROAS is 3. The benefit of this is that it actually brings the value of the purchase into the equation – now I get an overall picture of how much revenue my advertising actually brought in. Of course several costs need to be taken into account to see if I am actually profitable (Taxes, Cost of goods sold, Shipping, Storage etc.) but I am closer than I have ever been to actually understanding the basic question of whether my advertising has worked. It is this reason that an increasing number of business and marketing services are now choosing to adopt ROAS as their primary objective.

I believe it all represents a shift from dealing with Marketing with a marketing head on to dealing with everything with a Business head. Marketing can’t be thought of in isolation and every good marketing manager/assistant must be thinking of the overall business position and impact rather than purely their own department.

So we’ve got ROAS for now – who knows how long this will last until the next trendy acronym comes along and blows it out the water!

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