Is it really necessary for small and medium sized brands to look beyond ROAS for retail media ad campaign measurement?
Return on ad spend, or ROAS, a metric that measures the return from each dollar spent on advertising in the form of new revenue generated, is the primary metric used to measure the success of marketing campaigns. Historically, ROAS has been difficult to measure precisely, especially when brands ran advertising campaigns across multiple channels concurrently. Imagine a brand running ads in print, radio and TV.
What a brand could observe is the overall lift in sales generated by the campaign, but had very limited ability to discern the exact impact of each channel. Hence the famous adage about half the money spent on advertising being wasted, but not knowing which half.
One of the key attractions of online advertising, and retail media specifically, was closed loop attribution, or the ability to credit each new sale to a specific marketing channel, campaign, creative, etc. So why do industry experts advocate to look beyond ROAS or even replacing ROAS as a success metric altogether?
The primary worry is that ROAS, being a simple metric, ignores the broader complexities of the modern shopping journey. ROAS extensively relies on ‘last touch’ attribution, i.e. the sale is credited to the last point of contact between the brand and a customer: they clicked on the ad = the ad was responsible for making the sale. Every marketer knows that the path to purchase is far more complicated.
The worry is thus, that by oversimplifying our measurement, we’re prone to draw erroneous conclusions.
Another area of concern centers around the concept of incrementality, which is especially relevant in the context of retail media. Incremental sales is a metric that helps determine the difference between actual sales a brand generates during a specific timeframe and the estimated sales that would have been generated had advertising not been used. To put simply, are brands actually selling more by placing ads?
The concept of incrementality, which seems obvious at first glance, is actually extremely complex and grows ever more complex with scale. Let’s try illustrate it with an example: if a brand buys sponsored product ads on a retail media platform (like Walmart or Target) does it:
- increase the overall sales volume or just shift sales from one retailer / sales channel to another?
- increase the overall sales volume or does it substitute sales of one product with another product?
- actually sell more products, or simply does it sell more products online that it would have otherwise sold offline?
Given that most brands have multiple sales channels, are retail media ads actually leading to more sales? Or are they just shifting sales from one channel to another? Without determining a definitive answer to this question, looking simply at ROAS might again lead to misallocation of marketing funds. The worry is that just on the basis of ROAS, campaigns might be looking extremely effective, however they might not actually be leading to an increase in sales.
Given the above concerns, to what extent do small and medium sized brands need to look beyond ROAS in their efforts to grow sales through retail media advertising? Arguably, they do not.
ROAS is a simple and effective metric. The problems described above become material at scale, when brands have reached near market saturation. They’re the problems of the P&Gs, Unilevers and Coca-Colas of the world, companies that account for a very high percentage of goods purchased by consumers and often own multiple brands ‘competing’ on the same market (think Nestle and its wide portfolio of mineral water brands).
When competing against incumbent giants, smaller and medium sized challenger brands can effectively use retail media advertising, optimizing for ROAS, to increase their overall sales volumes.
Sponsored product ads allow challenger brands to position themselves above retail giants in generic search results on retailer websites. It can be stated with a very high degree of probability that when a challenger brand, with a fraction of the sales volume and brand recognition compared to an incumbent, places ads that position their product at the top of search results for its category defining search terms, their ad assisted sales will be purely incremental, as they’ll be taking customers away from more recognizable products. With that assumption, ROAS becomes the key metric in ad budget allocation.