Most agencies use metrics like ROAS, CPO and A/S to report on paid search campaign performance. At Omnitail, we use an entirely different metric, one that’s right in our name: We’re the “profit-driven marketing agency.” Why place such importance on profit? We believe it’s the only way to gain a full understanding of the impact of ad campaigns on your business.
What is operating profit?
The simple answer is, “the money that remains after you’ve accounted for unit and selling costs.” However, the reality is that determining profit is complicated, as it requires you to consider your costs and how to accurately track and account for them. While each business is different, some common factors we account for include:
- Ad spend
- Cost of goods sold
- Merchandise return rate
- Variable overhead (including payment processing or shipping costs)
- Customer lifetime value
Profit refers to the dollars left over after accounting for the cost of goods, other variable costs and ad spend. For example, let’s say you accrue $10,000 in revenue from paid ads in a given month and the average cost of the goods you’re selling is 35% of revenue. That would mean that the cost of goods for this chunk of revenue is $3,500. Add in your monthly shipping cost for sales attributed to paid ads, which is $500, as well as another $1,000 on advertising.
That leaves you with a $5,000 operating profit. This metric drives our bidding strategy and helps us make informed decisions about account management.
Why not use ROAS?
Return on ad spend (ROAS) has its place in account management—and it’s included, albeit not prominently—in our monthly reporting. At Omnitail, we employ ROAS as a metric to offer a broader look at the account rather than to determine the full effect of our advertising efforts or to dictate our strategy. Since ROAS doesn’t account for factors like cost of goods, variable overhead expenses, return rates or customer lifetime value (LTV), it’s not ideal to base your entire strategy around it. For example, imagine you are running ads at a 10x ROAS, but all of the ads feature products that come at a high cost to you and have a high likelihood of return. Meanwhile, you have some ads that run at a slightly lower ROAS, but offer much more comfortable margins and, on top of that, tend to create repeat customers. Obviously, the second set of ads are a better investment. However, you wouldn’t know that if you only took ROAS into account.
Bottom line
ROAS is an informative metric when evaluating the impact of diminishing returns on incremental marketing investment, but it’s not a full measure of the health of the account or a good compass for account strategy.
Our recommendations
We recommend profit-based account management. Using profit as a core KPI creates the opportunity to do two things:
Prevent overspending: As a rule, you shouldn’t spend more than it takes to make your program profitable and efficient. A majority of agencies set a minimum spend for the account, or set fees based on spend—creating a poor set of incentives. At Omnitail, we know costs are as important to the health of your business as revenue, and we strive to treat every ad budget as if it’s our own.
Maximize profit: Halting spend at an arbitrary level often halts profit as well. Many agencies limit accounts to a certain ROAS target and will not increase spend where there’s a risk it will lower ROAS. Conversely, we know that sometimes, spending a little more pays off. Measuring profit—as opposed to ROAS—gives us the freedom to manage your spend effectively to capture every dollar.
Favorite