When it comes to advertising on retail media networks, many marketers today use return on advertising spend (ROAS) as their metric of choice. But there can be some serious faults when ROAS is used by itself. And based on industry conversations, it seems that believability in ROAS is faltering. There is a strong desire within the industry to understand the true value that media drives vs. metrics that can feel inflated or inaccurate.
The limitations of ROAS
ROAS is calculated by dividing your attributed revenue by your ad spend. To calculate attributed revenue as it relates to a retail media network spend, depending on your methodology, you take an ad that was on a customer’s path to purchase and attribute the sale to that ad. For example, if a customer saw a display ad for coffee and then purchased coffee within the attribution window, the display ad would receive credit for that sale.
Skeptics might ask: What if the customer was going to purchase that specific brand of coffee anyway? ROAS becomes especially problematic in the case of search. When customers are searching for a specific brand, an intent to purchase already exists. Sometimes, these customers know the product they want to buy, but maybe not the specific brand.
The limitations of ROAS can be resolved through the addition of incrementality.
For example, a general search for coffee could indicate a customer needs to buy coffee, but is interested in learning about other brands, flavors or modes of consumption. Other times, customers know exactly what they want and search specifically for the brand and flavor they like.
In the second case, if the customer intends to purchase a specific brand and flavor, an ad that matches that brand and flavor might not be the best use of ad spend. Using ad spend in this case could protect against competitor brands using conquesting tactics but may not drive incremental sales of your brand.
Add a splash of incrementality
The limitations of ROAS can be resolved through the addition of incrementality. Generally, incrementality means that you can understand what additional sales happened because of ad placement. Usually, this is done during a campaign through a control group and measurement against a test group.
While sales are still attributed to all customers who purchased the coffee in the previous example, the difference in sales between the group who saw an ad and the group who did not is also measured. This helps marketers understand the two key components of incrementality: Customers who saw the ad and increased the items in their grocery carts and new customers to the brand.
This example demonstrates why the retail media industry should collectively move toward incrementality as the preferred measurement tool. Ultimately, incrementality helps advertisers become more efficient with their overall ad spending and only invest in areas that are truly driving increased sales.
The question that remains is: Should ROAS be thrown out entirely? The answer is probably not. However, marketers should take caution in using it independently of an incrementality metric. The benefit of ROAS is it’s generally easy to calculate and can be measured in near real time.
