Beware Of Diminishing ROAS – The Big D2C Challenge

Aarti Samant Feb 02, 2023

When it comes to digital marketing, ROAS (Return on Ad Spend) is a metric that can make or break your campaign. It's the ultimate litmus test for determining whether your ads are driving revenue or just burning a hole in your pocket. But let's be honest, who wants to be the person whose ads are lighting money on fire? Nobody. That's why it's essential to understand and optimise your ROAS.

First things first, let's break down the concept. ROAS is calculated by dividing your revenue by your ad spend. So, if you spend INR 100/- on ads and make INR 200/- in revenue, your ROAS is 2 (200/100). Of course, the higher the number, the better. But only get excited if you see a number in the double digits; anything above 1 means you're making more money than you're spending; anything below, and you're in the red.

Now that the fundamentals and logic are clear allow me to unravel what's happening currently in the D2C world of digital marketing.

Customer acquisition Costs were more lucrative than they were in 2020-21, and with time, new challenges, such as a drop in ROAS, have cropped up in D2C marketing. Multiple reasons are affecting your ROAS today.

The rise in direct-to-consumer (DTC) offerings post-pandemic has led to increased competition and lower conversion rates on DTC websites. It is due to low barriers to entry, which have allowed new and existing brands to enter the digital space, resulting in a 400 per cent increase in cost per click. Additionally, heavy discounting and deals have decreased the return on investment from online transactions. As a result, brands can no longer rely solely on major online advertising platforms to build their DTC businesses. Instead, they should focus on finding the right product mix with high margins and a return on ad spend of at least 5 per cent. Furthermore, keeping the cost of goods relatively low, with an average billing size of more than INR 1000 and unique, tangible products, can help avoid burnout and sustain future growth.

In addition, Apple iOs 14.5 updates, released on April 26, 2021added to the misery of ROAS, which requires all mobile apps in the app store to show a prompt to users on iOs. This prompt asks users whether they want the app to track them.

Here is a sneak glimpse of the prompt.

According to Flurry Analytics, only 4 per cent of US and 12 per cent worldwide iPhone users agreed to app-tracking last year. Before this update, the FB Pixel could directly connect Facebook users' app-to-onsite activity — in other words, actions on Facebook with actions on a business's website.

Facebook's data, attribution, and tracking are severely limited, affecting your ROAS.

How can DTC brands keep their ROAS in check?

● A differentiated "What" & "Why"

To stand out in a crowded market, brands must shift their focus from simply promoting products or catalogues. Instead, they should aim to establish a genuine and loyal connection with consumers, with a higher-order purpose – The WHY Entrepreneurs should avoid copying existing products and instead concentrate on developing unique and innovative offerings – The WHAT.

● Retention | Retention | Retention

A strong brand image and exceptional customer experience are crucial to retaining customers effectively. To achieve this, brands must deeply understand their customers and provide personalised services. Many D2C brands implement a combination of strategies such as exceptional customer service, targeted email campaigns, exclusive discounts, loyalty programs, convenient shipping and returns, SMS marketing, and a personalised experience to create a seamless customer journey.

● Content To Commerce –

Content marketing is essential for D2C brands to increase their visibility and make purchasing easier for customers. It encompasses various techniques to attract customers and expand the business, including blogging, social media, videos and podcasts. Additionally, content marketing is one of the most effective ways for D2C enterprises to connect with potential customers authentically. For example, with influencers' support, Sugar Cosmetics has built a culture around its offering and maintained a visual identity optimised for instant brand recall. Consequently, it has managed to create a committed and growing consumer base.

● Excellent Customer Experience

Consumers today are more likely to remain loyal to brands that provide excellent post-sales support, take responsibility, and offer prompt solutions. I have seen firsthand how brands generate positive word-of-mouth, and higher retention rates on lifetime value and repeat purchases can make online advertising viable.

● Efficient Martech Systems

From a tactical perspective, brands need to adopt advanced marketing technology systems to optimise their marketing funnel. Automated emailers, push notifications, heat maps, WhatsApp integration, detailed analytics, and other integrations are crucial for improving customer acquisition costs (CACs)

The emergence of D2C brands and the shift toward digital marketing have made brands rethink their digital strategies. They can no longer rely solely on paid marketing, word-of-mouth, or organic search traffic to grow their business. Instead, brands must be strategic with their marketing budgets and ensure they reach their target audience with relevant tactics that help them optimize their ROAS.