The Problem with ROAS
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While Return on Ad Spend (ROAS) is a widely used metric, it's important to recognise its potential drawbacks. 
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ROAS can provide valuable insights into the effectiveness of your advertising efforts, but it may not always paint a complete picture. By focusing too heavily on ROAS, you might miss out on opportunities to optimise your overall marketing strategy and drive long-term growth. 
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Here are some of its limitations:

• Attribution Issues: ROAS only considers the revenue attributed to a specific ad platform, ignoring other touch points in the customer journey.
• Spend Inaccuracies: It doesn't account for your total marketing spend, just the spend on that particular platform.
• Lack of Actionability: Focusing solely on attributed revenue from yesterday may not be an effective approach for predicting or improving future performance.
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Consider other factors alongside ROAS, such as customer lifetime value, brand awareness, and market share. By taking a holistic approach and examining multiple metrics, you can make more informed decisions that align with your business goals. 
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So, while ROAS remains a useful tool, it's essential to view it as one piece of the larger marketing puzzle.

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The Limitations of LTV:CAC
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For subscription businesses, looking at LTV:CAC (Lifetime Value to Customer Acquisition Cost) makes sense. But, for e-commerce brands without recurring revenue, this metric can fall short:
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• Ignores Ongoing Costs: The idea that you acquire a customer once and never pay to market to them again is a myth. In reality, customer retention is an ongoing process that requires continuous engagement.
• Assumes Unrealistic Loyalty: Brand loyalty is not as common as you might think. Customers often need ongoing marketing engagement to keep coming back for more.
• Overlooks Product Costs: LTV:CAC doesn't account for the cost of goods sold, which can significantly impact your profit margins.
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While useful, this metric falls short in direct-to-consumer scenarios where brand loyalty and repeat purchases are unpredictable. It assumes a static customer journey, overlooking the ongoing costs of retaining and engaging customers across multiple touch points.

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Introducing Profitable Scaling Margin (PSM) 
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So what should e-commerce brands use instead? PSM takes a more holistic view by factoring in all your costs and the number of transactions. Here's how it works: 
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PSM = (Lifetime Value - Cost per Acquisition - Cost of Goods Sold) x Number of Purchases
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By factoring in cost-per-acquisition (not one-time CAC) and cost-of-goods-sold, you get a real reflection of profitability. This lets you make strategic decisions to optimise offers, creatives, and channels based on bottom-line impact.
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Let's dive into a real-world example that showcases the power of Profitable Scaling Margin (PSM) and how it can help you make better decisions for your business.
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Imagine having a seemingly impressive 6X LTV:CAC ratio. Your Lifetime Value (LTV) is $120, and your Customer Acquisition Cost (CAC) is just $20. You make three sales over the course of 9 months, and your Cost of Goods Sold (COGS) is $10 per sale.

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Let's apply the PSM formula:

PSM = (LTV - CAC - COGS) x Number of Purchases = ($120 - $20 x 3 - $10 x 3) x 3

PSM = $90

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While a 6X LTV:CAC ratio might look great on paper, the reality is that you're only generating $90 in profit over 9 months, which equates to just $10 per month.
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Now, let's consider a different scenario. You're able to generate a $40 profit within a much shorter time frame of just 45 days. In this case, your profit would be approximately $26.67 per month.
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While the first scenario boasts a higher LTV:CAC ratio, the second scenario ultimately generates more profit in a shorter period. So, which scenario would you choose? The answer is clear – Scenario 2 is the winner!
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PSM gives you an actionable profit-per-time framework to make these strategic calls. 
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Do you want to dive deeper into the world of marketing metrics and discover how PSM can revolutionise your business? Watch this YouTube video for the full run-down.