You've probably been in this situation as well.
The Marketing Executive is struggling with a mostly unprofitable business. He sends me his customer data, I perform an analysis, and I show him that he is spending a fortune acquiring customers and then is generating very little future profit. He's losing $25 of profit acquiring a customer, and then over two years he makes maybe $30. That's a net of $5 variable profit. You cannot survive when your customer base delivers $5 of variable profit - there's not enough profit to cover fixed costs.
The Marketing Executive gets a terse look on his face, and he says the following.
- "Profit is an outdated metric. We look at ROAS."
- "ROAS as a metric is a best practice. All the smart digital folks use it. Profit is a relic of a time gone by."
- ROAS = $250 / $100 = 2.5.
- Ad-To-Sales-Ratio = $100 / $250 = 0.40.
- Did you generate enough profit on this transaction to align with future profit, allowing your business to thrive?
- Profit = (Sales) * (Profit Factor) - (Ad Cost).
- Profit = $250 * 0.40 - $100 = $0.
- Profit = $250 * 0.35 - $100 = ($12.50).