For a long time, all we had were clicks. Paid search marketers bought keywords and ‘traffic’. The engines reported on click counts and costs. But they couldn’t tell you anything about sales and revenue.

Web analytics packages, on the other hand, identified paid search traffic and associate the engine and the keyword with the revenue. But they didn’t have cost-per-keyword data. So for some time we were left to eyeball (or painfully match up in spreadsheets) the interplay between cost and revenue.

Several years ago the two began to meet. Google and Yahoo added ‘conversion tracking’, and added API’s that enabled cost data to be pushed into web analytics packages. Suddenly, if you could properly tag your site (often no simple feat) and get the API’s to work properly (often an intermittent miracle) it became possible to see how many orders and how much revenue each $dollar of paid search (or each explicit keyword, adgroup, etc.) was generated. We entered the era of ROAS.

Compared with having no meaningful relationship between cost and revenues, this was a great advance. But as mentioned in the first post in this set, return-on-ad-spend (ROAS) is a very limited and superficial way to measure results and success.

The problem is that ROAS ignores the cost of goods or services (plus many other fixed marketing costs) and gives the impression that every dollar returned above those spent for the advertising is a positive result. A 400% ROAS, for example, sounds terrific.

But if your margins are 25%, to take one simple example, you need a 400% ROAS just to break even. The chart below gives further examples of the ROAS required to hit certain ROI depending on your average margin.

Most businesses don’t have consistent margins across their product lines or service offerings, so the simplicity of translating ROAS into ROI in your head isn’t practical. And with promotions impacting online pricing - coupons, discounts, and special offers – actual margin calculations can vary sale by sale. To further complicate things, ROAS is reported on a keyword basis, but revenue is often generated from a basket of products that themselves have different margins.

The deeper you look, the less relevant and less useful ROAS becomes.