When it comes to measurement, Return on Ad Spend (ROAS) dominates e-commerce marketing. You get ROAS by dividing revenue by marketing cost. It is simple, easy to measure, and has the appearance of being important. To borrow from Stephen Colbert, there is a certain “truthiness” to it.

But ROAS alone is a poor predictor of retail success, because it hides margin problems and can mislead retailers about profitability.

If you have an ROAS of 8, for every $1000 you spend in media, you are getting $8000 in revenue. That feels like you are making a lot of money. In retail, though, revenue isn’t created equal. Clearance sales, refurbished items (“refurbs” or “repacks”), coupons, etc. can all drive your margins down. If your media spend is 12.5% of revenues, but ads only drove conversions in low/no-margin sales for an average margin of 11%, the great ROAS score actually produces a substantial loss.

To get more accurate measures, retailers need to look at marketing-adjusted profitability and lifetime value (LTV).

Marketing-adjusted profitability—revenue minus the cost of product and marketing—shows you both the true value of a customer relationship and what customers truly value. It also pegs the business value of marketing campaigns and vehicles.

LTV calculates how much a customer will spend in the future, and forms a barometer for marketing’s impact on the business. When retailers invest in campaigns and activities that generate higher LTV, they can amortize today’s media spend over more transactions and revenue.

To make these more complex calculations work, a number of e-commerce providers now apply sophisticated algorithms to predict LTV and identify the activities and media where big spenders congregate. So all retailers can begin to extend beyond ROAS into a more profitable foundation for marketing, starting by eliminating campaigns that suck up media dollars and return no-margin sales. These campaigns are takers, the retail equivalent of the acquaintance who borrows your car and returns it with the gas tank empty and the floor covered in candy wrappers.

With LTV, the importance of new customers comes into greater focus. New customers bring great energy to a brand, and they represent 100% untapped LTV (LTV actually declines as an existing customer makes more purchases toward a finite average total). While it seems complicated, it’s now relatively straightforward for retailers to tie first-time converters to marketing activity. With a combination of CRM and attribution technologies, you can start to see what is attracting new converters at scale.

Ultimately, retailers will be able to factor LTV into all audience targeting and buying. For now, the first giant step toward more profitable marketing is emphasizing the campaigns and units that pull bigger spenders from the prospect universe. 

Elite SEM is a digital agency specializing in performance marketing.

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