Arguably no businesses are under more pressure to grow, and grow fast, than private equity-backed brands. Yet one big thing they do to speed up is slowing them down. PE’s rigorous, data-led, results-now approach has led to tremendous value creation. But, sometimes metrics get overused and lead executives and board members astray. Right now, the use of return on ad spend (ROAS) is hindering growth of PE-backed brands across industries
ROAS has taken over advertising decision-making because it offers a tangible, immediate sense of marketing’s impact on the business: emphasis on the word “sense,” because the difference between what ROAS actually measures and what managers, executives, and boards take it to mean leads to mountains of marketing waste.
The allure of ROAS is the equation’s simplicity: directly attributable sales divided by media spend (think: I spent $1K on Google search ads, which generated $5K in direct sales on my website, thus a 5X ROAS). Less imminently measurable marketing tactics feel speculative by comparison.
The problem with ROAS
While certainly compelling (and an important signal to be sure), ROAS comes with some serious drawbacks:
- Few marketing channels can be confidently viewed through a ROAS lens.
- ROAS over values lower-funnel “last click” touchpoints, and fails to account for all the other factors influencing conversion.
- ROAS typically measures return in terms of sales, not contribution, obscuring the true profitability of your marketing.
- ROAS fails to account for incrementality, leaving open the question, “would I have captured these sales regardless?”
Here’s the secret that PE has yet to learn: The approach they find speculative is the one that data overwhelmingly shows creates the most value over a 1+ year time horizon. It’s brand marketing.
A better path for private equity
While ROAS provides a comforting sense of immediacy, the data overwhelmingly supports a more balanced approach that includes significant investment in brand. This isn’t just about feel-good metrics; it’s about driving outsize, measurable sales and profitability growth over a one- to three-year time horizon.
Consider the findings from Thinkbox’s Profit Ability 2 study, a meta-analysis of 141 brands covering $2.3B of media spend across three years, 10 media channels, and 14 sectors. The study revealed that brand advertising generates 2.4X as much profit return per dollar spent as short-term sales activation. Moreover, brand advertising’s effects last significantly longer, with 45% of its profit impact occurring beyond the first year, compared to just 2% for activation advertising.
These findings aren’t isolated. When MMA’s Brand as Performance Research Initiative matched individual-level ad exposure data with purchase behavior, Ally Financial discovered that consumers who view their brand favorably are 6X more likely to convert. Similarly, Campbell’s Soup and Kroger found conversion rates 2X and 3X times higher, respectively, among consumers with positive brand perceptions.
This same analysis revealed that many marketers are overspending on digital performance (read: Google and Meta channels) relative to its effectiveness. Traditional media, particularly TV, continues to drive significant returns and regularly outperforms digital channels in terms of ROI. By overinvesting in digital performance at the expense of more effective brand-building, PE-backed companies are draining their lifeblood.
A better marketing strategy
While PE firms might argue that their investment horizons don’t allow for long-term brand building, the data shows that brand effects start accumulating quickly. The results from brand investments meaningfully outpace performance tactics within a year and continue to compound over time. By contrast, growth from performance marketing is smaller and tempered by higher customer acquisition costs (CAC).
To achieve the rapid growth they seek over a three- to five-year time horizon, PE firms would be wise to embrace the powerful multiplier effect of brand marketing, which makes all other marketing more efficient.
Rebalance your budget. Les Binet and Peter Field’s The Long and the Short of It, a seminal analysis covering hundreds of campaigns, revealed that the optimal balance for most businesses is around 60% brand building and 40% activation. This balance will drive both immediate results and long-term, compounding growth.
Measure what matters. Complement ROAS with tools that help you understand the incrementality, profitability, and true ROI of your marketing investment. For example, Marketing Mix Modeling (MMM) allows you to assess the full impact of brand investments alongside performance marketing.
Reevaluate channel effectiveness. Don’t assume that digital channels always offer the best ROI. There can be a “moneyball” opportunity in underleveraged traditional media, particularly TV, which often works harder dollar-for-dollar than its buzzy performance counterparts.
The pied piper of ROAS has led many PE boards and portfolio companies astray. It’s time they embrace the full marketing spectrum and claim the billions of dollars in lost opportunity they’re leaving on the table.