The Dangers of Focusing Solely on Metrics Like ROAS
Don’t dismiss this as something that only happens to poorly performing ecommerce brands. We see this happen a lot. Here are the results of falling into the trap of KPI tunnel vision.
Why Metrics Like ROAS Don’t Tell the Full Story of Profitability
We’re using ROAS (return on ad spend) as an example because it’s a “shiny” metric that easily distracts a lot of businesses and agencies. For many, it’s the go-to metric for gauging their ad performance.
Spend $1 on ads. Make $4 in revenue. Boom! A 400% ROAS.
Celebrate the profitability, right!?
Maybe…if that’s the only metric you’re looking at. Remember that ROAS doesn’t fully account for COGS (cost of goods sold), operational expenses, or what happens after the sale. How’s your customer satisfaction and retention? Are you profiting after shipping, returns, fulfillment, etc.? Are you increasing your customer base?
If you (or your ad agency) only zero in on ROAS, then you lose sight of other factors that are more important to long-term, sustainable profitability.
- Product quality
- Operational efficiency
- Profit margins
- Long-term customer value
And that’s the problem — many ecommerce leaders get stuck focusing on improving specific metrics or KPIs while missing the bigger target.
Key Takeaway: Focus too much on specific performance metrics and it’s like an F1 team focusing more on their driver’s leg strength than on actually improving his driving.
You can’t forget the big picture.
Here’s what happens if you do.
The Risk of KPI Tunnel Vision
Focusing too heavily on improving a single KPI leads to a skewed view of performance and fosters short-term thinking. That’s because when you’re under pressure to make numbers look good on one metric, you’re more likely to use tactics that boost short-term revenue without considering the bigger picture.
Essentially…you end up confusing KPIs with business goals.
ROAS is down? Your first inclination might be to meet with your ad agency and pressure them to drive improvements in ROAS. To meet ROAS targets, they could reduce traffic volume to improve conversions, tweak the ad messaging, etc.
Those steps aren’t necessarily bad options in and of themselves. ROAS and profits might even improve in the short term.
So was that a win? Not necessarily. Why not?
If this was all you did, ROAS went from being a single KPI used as a tool for analysis to a main business goal.
Did anyone take a minute to consider…
- How will these changes affect long-term business goals? E.g. Reducing traffic volume to improve ROAS reduces the size of your sales funnel, reduces brand awareness, and ultimately reduces the volume of future potential customers. Not good.
- How will these changes affect other key metrics now and in the future?
- Is the ROAS problem related to deeper issues — friction in the checkout process, poor customer experience, weak product-market fit, or something else?
Key Takeaway: Don’t confuse KPIs as business targets. Keep goals as goals and KPIs as tools for reaching those goals. Focusing on short-term profitability and temporary boosts to a single metric will undermine the foundations of your long-term growth.
So how can you keep metrics in their place? In the next section, we’ll cover a few specific steps you can take as an ecommerce leader.
Improve Ecommerce Profitability By Shifting Focus from Short-Term Metrics to Long-Term Success
Here are 5 key steps ecommerce leaders should take to avoid KPI tunnel vision.
1 – Develop a Strategic Plan with Long-Term Goals
Why needed? A strategic plan aligns all your targets, actions, metrics, and KPIs with overarching business goals. That strategy helps you focus on what really matters instead of getting sidetracked with vanity metrics.
How to create your strategy: (This is a really quick overview. Don’t miss a future article with an in-depth strategy creation guide.)
- Identify your 3-5 year vision.
- Set specific long-term goals that support the overall vision.
- Break long-term goals into short-term actions.
- Identify combinations of KPIs that help track progress in reaching your goals.
The next step helps identify the KPIs to focus on.
2 – Differentiate Between Strategies, Targets, and KPIs
Why needed? One of the biggest mistakes ecommerce businesses make is confusing KPIs with targets. KPIs are tools — not goals. They help you measure progress and make data-driven decisions, but they shouldn’t become the endgame.
How to separate these elements:
1. Understand the Role of Cyclical Profit Activities vs. Fundamental Change
Think of your business like a person who needs more energy. Short-term, cyclical profit activities — improving a metric like ROAS — are like drinking an espresso. Sometimes you need a shot of espresso to get through the day. But if you keep drinking espresso after espresso, you’ll never sleep, have major anxiety symptoms and eventually burn out.
If you do choose to focus on improving specific metrics, be sure to cycle through them, alternating which ones you’re trying to improve. I.e. If you focused on improving one specific KPI this month, focus on a different one next month.
However, the majority of your focus should be on sustained activities and fundamental changes that create long-lasting “energy” for your business, like improving product quality, operational efficiency, and customer experience. These are like healthy eating, regular exercise, and getting enough sleep — fundamental changes that give you long-lasting changes in energy.
2. Look Beyond Shiny Metrics
It’s easy to be seduced by shiny metrics like ROAS. They’re easy to measure and give you immediate feedback. But they aren’t always the metrics that drive long-term profitable growth. So instead, focus on metrics that help you track fundamental improvements such as customer lifetime value and retention rates.
3. Keep Targets as Targets & KPIs as Tools
This is where a lot of businesses get tripped up. Remember, KPIs should serve your targets, not become your targets.
Use KPIs to ask the right questions.
- Why is our customer acquisition cost rising?
- Are we seeing diminishing returns on our ad spend?
- Are our customers staying longer or leaving after their first purchase?
These questions help you reach your strategic targets like profitability, efficiency, and retention. But don’t fall into the trap of chasing KPIs for their own sake. Keep them in their proper role as diagnostic tools to help you reach your bigger goals.
TRY THIS – Before continuing, take 5 minutes and a napkin and do this: Write down the last KPI you had a meeting about. Ask yourself…has this KPI become a goal or is it still a tool? Ask a colleague the same and see what they say.
3 – Engage Teams and Agencies in Open Dialogue
Why needed? “Doers” (agencies and internal teams) can easily become too focused on improving short-term KPIs. This usually happens when leaders pressure or incentivize them to hit quick results because they assume short-term wins always add up to long-term performance. (If you read our article on ecommerce planning, you know that’s not the case.) So you need open communication to help everyone stay aligned with your overall strategy.
How to do it:
1. Ask them the right questions.
- What are you trying to achieve? (Pay special attention if their answers revolve around a few KPIs.)
- How are these metrics moving us closer to our long-term goals
2. Compare their answers to your strategic plan.
If their actions are misaligned with your long-term strategy, it’s time to adjust.
How can you adjust? See the next section.
4 – Realign the Doers by Providing the Right Tools and Incentives
Why needed? The doers need a clear understanding of how their daily actions support long-term goals. And they also need the tools and incentives to help them stay focused on those goals.
How to do it:
1. Adjust key KPIs and targets to reflect long-term success.
Make sure your teams are using metrics that directly impact sustainable, long-term growth.
2. Update dashboards
Don’t use platform dashboards out of the box. The analytics they automatically show are probably not the right ones for your strategy. So once you define the KPIs that support your strategy, go in and customize your team’s dashboards so it’s easy for them to focus on the right metrics.
3. Incentivize based on long-term outcomes.
One of the best ways to ensure the doers stay focused on long-term goals is to tie incentives to long-term goals or to the actions that directly support those goals.
TRY THIS – Before continuing, take 2 minutes and write down the answers to these two questions:
- Have I incentivized my team and agencies?
- What are the incentives tied to — short-term KPIs or long-term goals?
Important! Those last 4 steps won’t mean much if you don’t do the next one.
Ensure Senior Leadership is Aligned and Trained
Why needed? Confusion eats profit for breakfast. And that’s what happens when you tell your team to focus on long-term strategy, but pressure them for short-term wins.
How to ensure senior leadership is aligned and trained:
1. Make sure they’re on board with the long-term strategy.
One of the best ways to get leadership on board is to get them involved in creating the strategy. Then make sure they understand how each department and team contributes to the strategy.
2. Train leaders on how to advocate for long-term success.
Show them how to communicate the importance of long-term profitability in meetings, strategy discussions, and everyday interactions. Also, show them clear examples of what not to do.
3. Have a plan in place to handle negative metrics.
Know what you’re going to do when a key metric takes a dive. Instead of going into panic mode and immediately pushing for improvement, create a process that ensures you don’t lose focus.
- Is this single metric really a sign of a long-term problem?
- What fundamental issues could’ve contributed to this?
- If we work to improve this KPI, how will it affect the rest of our key metrics?
Key takeaway: Confusion eats profits for breakfast. Leadership needs to promote a future-focused strategy and then practice what they preach.
For Long Term Ecommerce Profitability, Rely on the Broader Perspective
Don’t be the F1 team that only focuses on their driver’s leg strength. Instead, follow these key takeaways and action items to promote long-term profitability.
- Don’t confuse KPIs as business targets. Keep goals as goals and KPIs as tools for reaching those goals.
- To know which KPIs contribute to the success of your overall strategy, you first need to create your overall strategy and communicate it to your team.
- Make sure the doers and executives understand your long-term strategy and have the tools and incentives to stay focused on it.
Action Item for You: Here’s a checklist of questions to consider this coming week:
- What is our strategic plan?
- What is the last KPI we had a meeting about? Has this KPI become a goal or is it still a tool?
- Have I incentivized my team and agencies?
- What are the incentives tied to — short-term KPIs or long-term goals?
- Ask 3 members of my team which is most important to senior leadership — a specific KPI or a long-term goal. What did they say?
