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This article was originally featured on MarketerHire<\/a><\/em><\/p>\n Time and time again, we\u2019ve had new clients coming to us stating that they want to keep their ad costs as low as possible. You see this all over industry blogs, too; the focus of minimizing ad costs to maximize their ROAS.<\/p>\n However, this approach can actually impact your profitability in a negative way.<\/p>\n High ROAS isn\u2019t everything<\/a>, because it doesn\u2019t just exist in a bubble; it\u2019s only one variable in a more complicated equation that also needs to account for often-forgotten factors like your gross margins and discount codes.<\/p>\n In this post, we\u2019re going to discuss why profit is superior to ROAS, how to establish a realistic ROAS goal, and how to account for factors like discounts and incentives when assessing profitability.<\/p>\n When you\u2019re trying to come up with a realistic ROAS goal, it\u2019s important to first consider your breakeven point based on your gross margin. That is, what is the ROAS target I need to hit to avoid losing money on a new customer?<\/p>\n To calculate gross margin, you first need to take all of your variable costs on an average order into account, including but not limited to:<\/p>\n From there, gross margin is calculated with the following formula:<\/p>\n Gross Margin = (Average Order Value – Variable Costs) \/ Average Order Value<\/p>\n After calculating your gross margin, you can calculate ROAS targets with the following formula:<\/p>\n ROAS = 1 \/ Gross Margin<\/strong><\/p>\n Even once you have your target ROAS, however, it\u2019s essential to remember that it isn\u2019t the only thing you should be focused on, or even your top priority. It\u2019s only a single metric in a larger equation.<\/p>\n Plenty of entry-level advertisers are probably balking by now. If you aren\u2019t prioritizing low CPAs and high ROAS<\/a>, what should you be focusing on?<\/p>\n The answer is simple: Profit.<\/p>\n You can\u2019t scale with growing profit, and we\u2019ve seen advertisers lose money on ad campaigns that they never get back by forgetting to center profitability.<\/p>\n Profit will guide you to determine which campaigns are actually bringing in the right customers and that sometimes might be at the antithesis of a higher ROAS.<\/p>\n For example, a higher ROAS might actually be less profitable for you if you\u2019re heavily discounting or going on sale often. You need a higher ROAS to maintain profitability when your margins are squeezed.<\/p>\n It\u2019s common practice to add hefty discount codes onto ads to entice new users to convert. While this can be effective, it can also eat into your profit margins and your ROAS quickly, even if you don\u2019t notice right away.<\/p>\n Discounts and incentives<\/a> can be big levers that impact your breakeven point. Even if your ROAS seems to go up because more users are engaging and converting, it can undermine your profitability.<\/p>\n The larger the discount you give a customer, the higher your ROAS needs to be in order to breakeven. And since bigger discounts don\u2019t always mean more high-value customers, this can backfire in a big way.<\/p>\n Let\u2019s look at an example. If a client sells $100 organic pajama bottoms, they\u2019re looking for a very specific type of customer who is willing to spend that. If they advertise offering half off your first purchase, they\u2019ll likely see a surge of conversions, but those customers may never purchase again if $100 is out of their budget or if they just bought because it was a great deal. The brand spent a lot on ads and discounts on customers who will never convert at full value because they were deal seekers vs value seekers.<\/p>\n Going after cheaper customers can lead to customers who aren\u2019t as loyal, sweeping in for the deal. Many advertisers try to lead with free samples, limited-time offers, and first-time discounts. They assume that the customer will try the product, love it, and stay on, but that just doesn\u2019t always happen.<\/p>\n Deal seekers are notoriously fickle and often lack brand loyalty. They typically aren\u2019t worth acquiring, and definitely not on a paid social platform where you\u2019re taking on acquisition costs.<\/p>\n I know at this point in the article, we have a lot of readers feeling skeptical because discounts have worked for them in the past.<\/p>\n Let\u2019s look at a case study from one of our clients showcasing how discounts can impact your ROAS, audience value, and profitability.<\/p>\n We had a client we worked with that had what we lovingly dubbed \u201cBed Bath & Beyond\u201d syndrome. There were always coupons available, trying to leverage that buyer\u2019s FOMO. As a consumer, you were expected to buy with a coupon.<\/p>\nHow to Establish Your ROAS Goal<\/h2>\n
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What To Focus On Instead of Maximized ROAS or Lowest CPA<\/h2>\n
Why Discounts & Incentives Play a Crucial Role in ROAS & Your Breakeven Point<\/h2>\n
A Case Study in How Discounts Can Hinder Your ROAS<\/h3>\n