Any conversation about the value of MarTech must consider the bottom line of both marketing and technology: profit. Major initiatives and specific tools that harness technology to achieve marketing goals only have meaning to the extent they generate incremental dollars. Return on Ad Spend (ROAS) measures return on marketing spend while ROI goes a step further to establish incremental profitability. Let’s look at how these measurements to provide value.
Data-Driven Marketing KPIs
All reporting metrics are driven by data. In the case of KPIs that provide visibility of a “return” on marketing, the data involved is generated by 1) top line sales and 2) expenses necessary to create those sales. The KPI that results can be a ratio or percentage.
Marketing strategies deliver media tactics to sell products or services. Technology allows for data to be collected from every transaction. The scale of that data is significant, so technology also helps us analyze the data to determine
- where the sales came from,
- how many dollars were collected and
- information around who made the purchase.
Breaking Down ROAS and ROI
ROAS focuses on marketing spend itself and how much value remains after just the marketing expense. For every marketing dollar we are going to spend, we can set expectations for how many sales dollars are generated to the top line for a business.
If an ad cost $1,000 and it generates $4,000 of sales, then the ROAS is 4:1. This also can be understood as a 25% marketing cost. The other 75% of the sale is left to pay for all the other expenses of the business, and hopefully some profit!
How the “cost” is understood is the wildcard for ROAS calculations. It is similar to investing in the stock market. If I buy a stock for $1,000 and sell it later for $4,000, the return on that investment is 4:1. However, while the stock may have cost $1,000, I may also have paid a small fee to a broker to make that purchase. In reality, I paid $1,007 for the stock, not just $1,000. The return was actually 3.97:1 for this value. As zeros are added to the investment opportunities, the decimal matters.
The same goes for marketing ROAS. While you may have a 4:1 ROAS for the Google Ads campaign, what about the fee you paid an agency to deploy your program? That has to be considered as well. As the end of the day, ROAS is an excellent way to measure how marketing costs compare to each other, but it is not as useful when needing a more comprehensive view of profitability.
ROI also considers marketing spend but incorporates all other “variable” costs associated with generating each revenue dollar. This KPI involves all the variable costs necessary to get the product to market, the order taken and eventually shipped to the customer. What is left contributes to overhead and profit. This more comprehensive analysis blends marketing with technology solutions that combine data from marketing and financial records.
The financial data elements are associated with the product cost (Cost of Goods Sold) and fulfillment processes (order taking, pick, pack and ship). This is a more comprehensive view of the value of marketing investments.
ROI allows for more than just ranking between marketing channels. This view allows for investment decisions to made on a breakeven basis. After the marketing investment is spent, the resulting order may or may not have made any profit. ROI can help determine this important intelligence. This more detailed analysis is very useful for comparing offline versus digital investments.
What is interesting is that while marketing is considered a variable cost and included for both ROAS and ROI, technology costs are usually amortized as capital costs or show up on the IT side of any budget. That means the profit expected from MarTech on an order-by-order basis is more favorable than when considered over the longer term of IT expectations.
Marketing strategies and tactics are blended with technology to measure the value of MarTech strategies. At the end of the day, the most common value to be determined is the incremental profit each order of a product or service represents.