How private equity’s obsession with this one marketing metric is stifling brand growth
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Arguably no businesses are under more pressure to grow, and grow faster, than private equity-backed brands. However, the biggest thing they do is speed up and slow them down. A rigorous, data-led, results-driven PE approach has now led to greater value creation. But, sometimes metrics are overused and lead managers and board members astray. Currently, return on ad spend (ROAS) is limiting the growth of PE-backed brands across industries.
ROAS has taken over marketing decisions because it provides a tangible, immediate sense of marketing’s impact on the business: emphasizing the word “perception,” because the difference between what ROAS measures and what executives, managers, and boards are taking you to. means it leads to mountains of marketing waste.
The appeal of ROAS is the simplicity of the equation: directly attributable sales divided by media usage (think: I spent $1K on Google search ads, which generated $5K in direct sales to my website, thus 5X ROAS). Less measured marketing tactics feel predictable in comparison.
The problem with ROAS
While quite compelling (and an important signal to be sure), ROAS comes with major drawbacks:
- Few marketing channels can be confidently viewed through the lens of ROAS.
- ROAS is more than the “last click” lower funnel touchpoints, and fails to account for all the other factors that influence conversion.
- ROAS often measures return in terms of sales, not contribution, which hides the true value of your marketing.
- ROAS fails to account for growth, leaving the open question, “would I have taken this sale anyway?”
Here’s a secret that PE has yet to learn: The way they find it is speculative is the one that the most data shows creates the most value over a 1+ year period. Product marketing.
A better way of private equity
While ROAS provides a comforting sense of immediacy, the data strongly supports a balanced approach that includes significant brand investment. This isn’t just about feel-good metrics; it is about exceeding size, measurable sales and profit growth over a period of one to three years.
Consider the findings of Thinkbox’s Profit Ability 2 study, a meta-analysis of 141 brands covering $2.3B of media spend over three years, 10 media channels, and 14 sectors. Research has shown that brand advertising generates 2.4X as much profit per dollar spent as a short-term sales promotion. In addition, the effects of brand advertising are very long-lasting, with 45% of its revenue impact occurring beyond the first year, compared to 2% of advertising activations.
These findings are not isolated. When the MMA Brand as Performance Research Initiative individual-level data on ad exposure and purchase behavior, Ally Financial found that consumers who view their brand in the right way are 6X more likely to convert. Similarly, Campbell’s Soup and Kroger experience 2X and 3X higher conversion rates, respectively, among consumers with positive brand opinions.
This same analysis reveals that many marketers overspend on digital performance (read: Google and Meta Channels) relative to its effectiveness. Traditional media, especially TV, continues to have significant returns and consistently outperforms digital channels in terms of ROI. By overinvesting in digital operations at the expense of effective branding, PE-backed companies are bleeding themselves.
A better marketing strategy
Although PE firms may argue that their investment horizons do not allow for long-term product development, the data shows that product results are beginning to accumulate quickly. The results from product investments dramatically exceed operating strategies within a year and continue to compound over time. In contrast, growth from performance marketing is low and influenced by high customer acquisition costs (CAC).
To achieve the rapid growth they seek over a period of three to five years, PE firms would be wise to embrace the powerful multiplier effect of product marketing, making all other marketing more efficient.
Re-evaluate your budget. Les Binet and Peter Field The Longest and the Shortest of You, A critical analysis involving hundreds of campaigns, revealed that the optimal balance for most businesses is about 60% product creation and 40% activation. This balance will drive both immediate results and long-term, compounded growth.
Measure what’s important. Complete ROAS with tools that help you understand the lift, profitability, and true ROI of your marketing investment. For example, Marketing Mix Modeling (MMM) allows you to assess the full impact of brand investments in conjunction with marketing operations.
Recheck channel performance. Don’t assume that digital channels always offer the best ROI. There may be a “moneyball” opportunity for unrated traditional media, especially TV, which tends to work harder dollar-for-dollar than its busy operating counterparts.
The pied piper of ROAS has misled many PE boards and portfolio companies. It’s time for them to embrace the full spectrum of marketing and claim the billions of dollars in lost opportunity they’re leaving on the table.
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