Know-How Exchange : Research/Metrics

As a marketing dude with a degree in accounting (don’t ask) it sure sounds like a lousy metric for most applications. Here's why:

ROAS is great for measuring the effectiveness of your advertising, especially for comparing in-house programs and also comparing programs across companies in the same industry. It compares net revenue (sales less advertising expenses) to the cost of the advertising that produced the revenue. Simple, effective, and consistent.

To morph this into a NPOAS as you decscribe, or Net-Profit-on-Ad-Spend, introduces all of the cost components that go into deriving net profit from revenue. This includes all of the expense of the organization - literally all of the overhead for the entire company. So, unless you are comparing two nearly identical companies, you will not get similar or comparable results for this type of calculation. Also, consider that many start-ups and young companies do not generate any positive net income for their first years and you get a number that simply cannot be calculated.

Best of Luck, JohnnyB.
if you like the advice, read the blog, https://bit.ly/75KkSG

Dear Aaron,

I'm NOT an accountant, nor am I what you might call a
numbers person. Fortunately for you, John (above), is.

But it seems to me that for every $1 your client spends on advertising, if they REALLY want to see $4 in profit per dollar spent, their message, offer, and risk reversal terms need to kick ass, and I mean they've got to REALLY smoke!

The offer, the sales terms, and the sales pathways must all, to the last one, be utterly free of barriers, and the price per item, and its overall net, must be off the chart.

To do this, your client needs a list of buyers that are segmented to the nines and totally keyed-in,locked, loaded and ready to rock and roll. We're not just talking about happy shoppers here, we're talking about a ravenous list of buyers who are utterly price immune. AND, on top of this, as John neatly points out, every penny in overhead—EVERY LAST, BLUE-GREEN WITH AGE PENNY also has to be taken into consideration BEFORE the final tally and its 300 percent margin.

So, wholesale cost of goods, minus ALL overheads (everything, soup to nuts), plus EXTREME mark up and you ain't in Kansas any more but you could come close to your three hundred mark.

Saw this happen on goods from China five years ago, goods ordered via a company I will not name out of Florida.

So, the order goes through our Key West friends and everything's peachy. Seven days later, a package arrives in my office from Shanghai: express air. Open it up (and remember, the goods have been paid for Stateside) and there are the goods AND an invoice.

Cost of goods here in the US? $3.65 apiece. Price per piece on the invoice from the factory in China (an invoice that should NOT have been in the box—whoops, someone got their ass kicked over that, I'm sure) 10¢ each.

I'm a little foggy on the EXACT numbers so please, let's not have anyone trying to correct my arithmetic because it'll be a waste of your time and mine. But as I recall, the mark up was 2,600 percent.

So, how do you jack up your ROAS? Outsource production to Asia!
Just my humble two cents' worth. Hope this helps.

Gary Bloomer
Wilmington, DE, USA

To add to Gary's great post.

The benchmark should be on gross sale vs net profit. There are too many things you cannot control to get to net. You can't control his costs, his operating expenses. If he wants that kind of benchmark, then you have to be able to have influence on those things. And that is not your biz. Meaning, you could bring in those figures, but he can squirt it away-- and you are judged as ineffective.

It may not just be wholesale and buying in China, you can take $ from the bottom line in all kinds of normal business practices.

What you client is telling you-- he's a sales oriented guy. Large co's spend tons on building a brand-- he's like most small biz-- he wants sales.

What is his average sale? It'll take him longer to recoup his marketing $ if his average sale is $5 vs $5000 -- on the surface.

Instead of looking short term, have him look at what that customer is worth to your client over a lifetime. If you're a coffee shop and your average ticket is $4 (obviously not a Starbucks) you might look at that and say-- it'll take me a long time to justify even a small one time $400 ad at $4 a pop. Its easy to say, you'd need 100 new clients to pay for that. But that's $20/week, $80/mo, $960/year, $4500 5 years... x how many people? That is 10x his initial investment achieved with one new person. Then this one new person brought in a friend...

I'm not suggesting anyone run one ad 1x and call it marketing. Buy by expanding your clients thinking to lifetime return on a customer -- and their referrals, and his goal is more than achieved.

Your job in marketing is to bring them in. His job is to manage his costs and profitability, and retain the customers-- for life. He's also telling you he needs sales, not building a brand. And you have to adjust your marketing to accomodate that goal.

Wow, ROA of 300% is an ambitious target indeed! I agree with most of my colleagues above, and would remind the client about the empirical generalization (based on decades of rigorous research) that the advertising elasticity for established companies/brands is 0.05-0.10.

In other words, doubling the ad budget typically yields only a 5%-10% increase in gross sales. Depending on the product's contribution margin (which you indeed can not control - just make sure they don't include fixed costs!), the client's target may or may not be achievable. I only once saw this target return for an established company, a Dutch furniture manufacturer, which allowed me to share the results:

1) their paid search (Google Adwords) spending yields 55 Euros PROFIT for every Euro spend! We could not believe this but confirmed it in a field experiment where they doubled their spending and got a fourteenfold profit increase. Of course, it is not so easy to double paid search spending: you can bid higher and for more keywords, but need potential customers to click through (i.e. this is customer-initiated rather than a firm-initiated). Thus, as Garry said, this was possible because customers are interested (you do not Google 'office furniture' unless you are in the market), and the company has a great offer that also sounds good online.

2) however, their key offline activity (70% of their marketing budget) returned LESS than 1 euro profit for every euro spend! This was a direct mail piece sent to an address list of potential customers. Another activity, faxes, did yield 3 euros profit for every euro spend, mostly because it helped close the deal for customers a the end of the purchase funnel. Both direct mail and faxes had sales elasticities of 0.05, in line with the empirical generalization for firm-initiated marketing actions.

In sum, I admire your client for aiming high, but believe they are leaving a lot of money on the table by being too conservative. I would suggest giving them some questions similar to a portfolio risk profile: e.g. does saving $10,000 on a potentially unprofitable marketing activity really outweigh the upward potential of making $20,000 more in profits?
I they truly believe in their product and it is targeted to the right customers, they should at least experiment with different forms of advertising, then analyze their ROI and decide whether or not to continue with them.

Hope this helps - I can give you further references if needed

Cheers

Of course every situation and every industry are different, so there is no reliable norm that I'm aware of. That said, my reaction is that 300% is extremely high -- especially when you consider the pressures on net profit for retailers. In fact, even 100% would seem like a high figure on first blush.

Be sure that you (and the client) are looking at the right numbers. As Koen points out, this sure seems very conservative ... to the point of leaving a lot on the table. Would the client not be happy to have, say, 200% on his/her advertising investment?

Aaron -

I have to echo what others have said regarding product and industry. The make a huge difference. NI compared to Ad spend on a pharmaceutical or luxury product might easily exceed 300%. So in my opinion, 300% is reasonable given a high profit margin and target market that is well defined and easy (read: efficient) to reach. Other factors I'd consider are:

- competition
- barriers to switching (how high are the switching costs and how easy is it to capture a new client from a competitor?)
- strength of their brand, and
- value proposition

I'm assuming you've asked them if they've seen this kind of return in the past and for details on the campaign. Ultimately, where did they get this benchmark from? If it's historical and everything remains constant, I'd say you should expect they'd get similar return on any tactics you put in place.

Good luck!

Josh Kermisch