Paid search is one of the marketing activations brands use the most to promote their products on retailer platforms such as Amazon, Walmart, or Instacart. With the explosive growth of eCommerce in the last couple of years, CPGs have significantly increased their paid search budgets, resulting on a growing need to truly understand and manage paid search performance. But the way that paid search performance is measured and reported can often be deceiving, leading to leadership misinformation, bad decision-making, and a negative impact on business results.
The misleading (non)performance metric: Return On Ad Spend (ROAS)
Paid Search ROAS is calculated by dividing the revenue generated by the paid search activation by its total cost. That is, if you invested $100 in paid search for a certain category/brand/product, and sold $400 through those sponsored positions, your ROAS would be $54. The problem? ROAS has no regard for how much of this revenue would have happened without the paid search activation. What if you were already selling $350 of that category/brand/product before you had activated any paid search? In that case, your incremental sales would have been only $50, at double the cost – not great performance.
The actual performance metric: Return on Investment (ROI)
Paid search ROI is calculated as the incremental sales driven by the marketing activation, divided by its cost. The key word here is incremental – ROI considers only those sales that were a direct result of the paid search activation, the sales that would have not happened if paid search hadn’t been on. ROI is for that reason, a true measure of paid search effectiveness.
While retailers currently do not provide the capability to obtain ROI data (except for Instacart, where it is in pilot phase), CPGs can get directional ROI data by performing live, asynchronous tests on specific paid search activation strategies. While results obtained by this methodology are directional, the derived insights can be extremely useful to truly understand and optimize performance.
Why is ROAS still being widely used?
The reason why ROAS is still widely being used as the metric for paid search effectiveness reason comes down to a “vicious cycle” between the CPG media teams that are tasked with managing paid search budgets, and the media agencies that execute the work.
Agencies, who are typically considered the experts, often encourage optimizing for ROAS, a metric that they can easily perform on by targeting “easy” shoppers – those that are very close to converting, and that would have probably converted regardless of the paid search activation. This “excellent performance” is then reported to the CPG media teams, who can leverage this information to shine in the eyes of management. None of them necessarily do this on purpose, but their drive for results is paired with easily available, and seemingly fantastic data (albeit deceiving).
Bottom line
It is important to encourage teams to challenge their ways of working and operate in an environment of constant growth and pursuit of excellence. Challenging and inspiring teams to continuously strive for more will result in their true interest to find real methodologies to monitor performance, uncover opportunities and hold partners accountable for what they deliver. Agencies need to be held accountable for driving true incremental sales with the budgets that they manage, not sales that might have occurred regardless of their actions.
For CPGs looking to truly understand and continuously improve their paid search performance, ROI is the metric to be used, even if it is directional, until retailers develop a better alternative. While getting to it is somewhat complex, it is well worth it when investment is sizable. ROAS should not never be used as a proxy for paid search efficiency, as it has no relation whatsoever with how effective the tactic is in driving incremental sales.
