Today, marketers face an ongoing challenge: accurately measuring the true impact of their advertising endeavors. Metrics serve as the lifeline of any marketing strategy, leading us to discover the strategies that yield results and those that fall short. While metrics like Return On Advertising Spend (ROAS) or Profit on Ad Spend (POAS) have been indispensable, they only scratch the surface. They lack the depth to capture the full spectrum of customer interactions, leaving marketers hungry for a more comprehensive solution.
Therefore, we are excited to introduce two transformative new metrics: Acquisition ROAS (short: aROAS), and Acquisition POAS (aPOAS).
ROAS: An Overview
Before diving into our newly introduced metric, let's recap what traditional ROAS is. ROAS calculates the total revenue generated from an advertising campaign divided by the total spend on that campaign. The formula looks like this:
ROAS = Revenue/ Marketing spend
It's an effective measure of the overall effectiveness of your advertising efforts, offering a high-level view of how well your ad dollars are translating into sales.
New Customer ROAS
Another metric marketers tend to measure is New Customer ROAS, which narrows down the focus to only consider revenue generated from newly acquired customers through the advertising campaign. This metric provides insights into the effectiveness of their campaigns in attracting new customers, a crucial element in long-term business growth.
The formula for New Customer ROAS is:
New Customer ROAS = Revenue from New Customers / Marketing spend
POAS: An Overview
Another key metric that marketers consider is POAS (Profit on Ad Spend), which zeroes in on the profit (contribution margin 2) generated solely from customers acquired via advertising. This metric offers companies valuable insights into how well their campaigns are converting ad spend into actual profit, an essential factor for sustainable business expansion.
The formula for POAS is:
POAS = CM2 / Marketing spend
This helps businesses to strategically evaluate the real impact of their advertising efforts.
New Customer POAS
New Customer POAS offers marketers valuable insights into how well their campaigns are performing in terms of bringing in profits from new customers and to understand the profitability driven by first buyers.
The formula for New Customer POAS is:
New Customer POAS = Profit from New Customers / Total Ad Spend
This helps ensure that your ad strategies are not just generating revenue, but are also profitable when it comes to acquiring new customers.
Limitations
However, what's often overlooked in these metrics is revenue from a significant group—reactivated customers, or customers who have re-engaged with your brand after a period of inactivity.
While traditional ROAS, New Customer ROAS, POAS, and New Customer POAS offer valuable insights, they are not without limitations. Most notably, they do not account for the full customer lifecycle. ROAS includes all customers but doesn't differentiate between new and existing ones or those who have returned after a period of inactivity. On the other hand, New Customer ROAS focuses solely on new acquisitions, ignoring revenue from reactivated or loyal customers. Also, both POAS and New Customer POAS have similar limitations but are looking at profitability instead of revenue (CM2, to be more specific).
Introducing aROAS and aPOAS
To fill this gap, we're excited to introduce two game-changing metrics:
Acquisition ROAS (aROAS), is a metric that considers both new customer revenue and revenue from reactivated clients. Specifically, a reactivated client has not made a purchase for e.g. 60 or more days but has been re-engaged through your advertising efforts.
The formula for aROAS is:
aROAS = Revenue from New Customers + Revenue from reactivated Clients / Marketing spend
Acquisition POAS (aPOAS) is designed to measure the profitability and effectiveness of your acquisition and reactivation efforts, specifically in the context of acquiring new customers and reactivating dormant ones.
The formula for aPOAS is:
aPOAS = (CM2 from new + CM2 from reactivated customers) / Marketing spend
Here's a breakdown of each type of Contribution Margin:
- CM2 from new: This represents the contribution margin from new customers. The contribution margin is essentially the revenue from new customers minus all costs required to fullfil the order (COGS, transaction, logistic + fullfilment costs)
- CM2 from reactivated customers: This is the contribution margin from customers who have been reactivated, meaning they haven't made a purchase in a certain period (e.g. 60 days or more) but have returned due to your marketing efforts.
Why aROAS and aPOAS are Game-Changers
By blending new and reactivated customer data, aROAS and aPOAS will sharpen your focus: Instead of solely chasing new acquisitions, it ensures retention and reactivation activities aren't overlooked. It's precision and strategy in one.
Examples
To illustrate the impact of aROAS, consider an e-commerce company that spends $10,000 on an advertising campaign. The revenue from new customers amounts to $15,000, and they also re-engage customers who haven't purchased in over 60 days, generating an additional $10,000 in revenue. Using aROAS, the focus shifts to a more comprehensive $25,000 in generated revenue, yielding an aROAS of 2.5x, compared to a New Customer ROAS of 1.5x.
To demonstrate the significance of aPOAS, let's extrapolate the above example with a $10,000 budget allocation for a marketing campaign. Assuming the contribution margin (CM2) from new customers is $8,000, and the CM2 from reactivated customers who haven't made a purchase in over 60 days is $5,000.
In this example, the aPOAS is 1.3x, which means that for every dollar spent on marketing, the company gains a contribution margin of $1.30 from now and reactivated customers. This is a more comprehensive measure than just looking at the New Customer POAS, which would be 0.8x ($8,000 / $10,000).
How to Implement aROAS and aPOAS
Incorporating aROAS into your marketing analytics is straightforward:
- Segment Revenue Streams: Categorize revenue into 'New Customer' and 'Reactivated Client' buckets.
- Tracking: Utilize tracking codes and analytics tools to identify reactivated clients.
- Calculation: Use the aROAS and aPOAS formulas to evaluate your advertising campaigns
How to Implement aROAS and aPOAS
As of today the Admetrics Data Studio features the following new metrics to track your Acqusition ROAS and Acquisition POAS:
- Reactivated Customers: The amount of customers that are considered reactivated (e.g. did not purchase for 60 days)
- Customer reactivation rate: The percentage of customers that have been reactivated
- aROAS: Acquisition ROAS
- aPOAS: Acquisition POAS
You can use the metrics in any report and understand them on channel, campaign ad, or creative level.
When to consider a customer as inactive differs from business to business and product to product. We will work with our clients to configure this timeframe as we see fit.
The introduction of Acquisition ROAS (aROAS) and Acquisition POAS (aPOAS) marks a significant leap forward. By considering both new and reactivated clients, these comprehensive metrics offer a nuanced, more effective way to measure and optimize advertising efforts.
Ready to make smarter, more efficient marketing decisions? Give aROAS and aPOAS a try and revolutionize your approach to customer acquisition. Install Admetrics for free today and discover the perfect tools to create strategies that drive sales, foster customer loyalty, and maximize ROI.
