High ROI is awesome, but it's more important to focus on PROFIT instead. Why is that? (30)
High ROI is awesome, but it's more important to focus on PROFIT instead. Why is that?
This thread is another follow up from this thread posted by Amy (Vortex): http://stmforum.com/forum/showthread...Avoid-(Part-2) and particularly the Mistake #7. Maximizing ROI Instead of Profits.
There are several important metrics that we, affiliates, have to follow in order to run a successful operation. ROI (Return On Investment) is definitely one of the most important ones.
Just to make sure we all know what we are talking about, let me define ROI really quickly. Here is a simple formula for you to use, when calculating ROI :
Simply put, ROI tells you whether you turned any profit at all and how many % of your initial investment it was.
In case your ROI is +50%, this means you made the whole investment back PLUS 50% of it on top of that, which is your profit.
ROI of 0% means you made your investment back, but didn't turn any profit.
In case your ROI is -50%, you didn't make any profit, you actually lost 50% of your initial investment.
EXAMPLE : Let's say I invested $1200 into traffic and my revenue was $1755. Here is how I calculate my ROI.
((1755-1200) / 1200) * 100 = ROI was 46.25%
I'd say everybody understands the way we calculate ROI and what it means by now, so let's move on.
WHY ROI ISN'T THE MOST IMPORTANT METRIC?
It's easy to get obsessed with ROI … the higher the ROI the better we are doing, right? WRONG!
ROI is just a % value that shows you how effectively you are spending every single $. But it doesn't tell you anything about the bigger picture, which is the performance of the whole campaign. Your goal is to make the most possible $, to maximize your overall profit.
We are not here to fight for the highest ROI, that number alone won't buy us anything. Making $5 for every 1$ you spend is awesome, but what if you can only spend $5 this way per day? That's pretty much pointless.
EXAMPLE: What would you rather have, a campaign spending $100 per day with a ROI of 100% or a campaign spending $1200 per day with a ROI of 10%… The first one has 10 TIMES higher ROI than the second one, but still, the $1200 per day campaign is producing more profit than the first one.
First campaign is making $100 profit per day, the second one is profiting $120 per day. So even thou, the ROI looks WAY worse with the second campaign, it would still make you more money in the end.
SO, SHOULD YOU IGNORE THE ROI %?
Not at all, that would be a huge mistake. You need to watch your ROI closely, just keep in mind that the bottom line is more important than a good looking % value.
As a lot of other things in AM, it's important to find a sweet spot, some sort of balance that works the best for you. High ROI is awesome for your cash-flow, as you need to invest less $ to reach the same returns, compared with a Low ROI campaign.
The problem is, High ROI is usually tied to lower volume, and the minute you start to scale, your ROI will start decreasing too. I will explain this more a bit later on below.
You also need to set a line somewhere, that you won't go below in terms of ROI. There are fixed costs that you need to consider – tracking, servers, employees … at some point, campaigns with low ROI simply stop being profitable and you're basically just feeding the networks and keeping nothing for yourself.
IS THERE SOME SPECIFIC ROI % YOU SHOULDN'T GO BELOW?
The lowest ROI that I still consider being worth my time, is around 8-10%. I'm still running these campaigns in case I'm able to reach $XXXX per day in volume as it means a couple $100s profit per day, that I will happily take anytime. But lower than that really isn't sustainable. Few bad hours during the night can effectively erase a few days of profit in this case and that's a risk I'm not always willing to take 
Real life example : I was running app installs (DU Battery Saver) at 7% -10% ROI for some time (at the end of the goldrush), before it stopped converting for me for good. It was on autopilot, the advertiser was well funded and the campaign was stable. The volume was $3000 - $4000 per day, so $210 - $400 profit per day.
Given the conditions, the risk was low and the campaign made me solid profits, despite the super low ROI. However, this was quite a unique beast, usually it's not really a good idea to operate with such low ROI numbers.
WHY IS IT HARD TO KEEP HIGH ROI WHEN SCALING?
The strongest argument to focus on profits instead of ROI is tied to acquiring volume. More often than not, it's not possible to maintain high ROI when trying to get more traffic for your campaigns. There are several reasons for this :
1. What's the easiest way to get more volume? RAISE the bid … higher bid = higher cost of traffic … bye bye high ROI
2. Another way of raising volume is to loose the impressions cap. Higher cap equals to lower CTR, that equals to higher CPC and we are back at the precious point … bye bye high ROI
3. Next one is to open more placements for your campaign, restarting some that didn't perform that good before, entering lower quality placements … all of this will result in either higher traffic costs or lower CVR, which decrease our ROI further.
4. Did you narrow your targeting down when optimizing? Let's say you are targeting just a specific segment, because it worked the best for you : Android smart-phones for example. To get more volume, you would open iOS too and bang, ROI will probably decrease.
… I could go one but I'm sure you understand where I'm going
Pretty much anything you do in an attempt to get more volume, can have negative effect on your ROI. Every experienced marketer has a set of proven placements and creatives that they use to test new stuff. These tend to be the best ones obviously. So scaling further usually decreases our ROI. It's completely normal.
NOTE: Here is one advice for you, that you should definitely follow. When scaling a campaign, always make sure that the increased volume will justify the loss of ROI %. You need to be able to analyze whether the increase in revenue actually covers the loss in ROI.
EXAMPLE : I'm starting with a 100% ROI campaign that is giving me $200 per day profit, which means I'm spending $200 per day and the total revenue is $400 per day. Let's say I raise the bid, which increases my daily spend to $400 and the revenue goes up to $580 per day.
My ROI is now 45%, which is not a problem on it's own, but the problem is, my daily profit now is only $180 compared to $200. The ROI simply went down too much in this case. Always compare the extra revenue with how the profit changed, profit is the most important metric!
That's it guys, focus on PROFIT and use ROI as a metric to get you there, not the other way around!
probably the best clear explanation I had ever read on ROI and Volume. Great post.
Originally Posted by ackbar22000
Great post, to the point and very good flow - easy to read!
Very clear explanation, great post, cheers
Seems like these follow ups on Amy's list are well received, I will continue writing them
Originally Posted by matuloo
Thanks for writing up on my request! Very helpful would love to see more!
Originally Posted by brandonsharpe
in case you have more ideas for articles, shoot them my way
Great post, really usefull
Great write up as always!
But this one got my attention:
If you consider click loss (okay let's say it's considered) + tracking + servers + people + taxes you get to even much lower %.
Plus not talk about the risk that you are facing with app install advertisers (I know they were behaving differently 2+ years ago), but I would definitely not recommend to newbies to go for a such low ROIs these days, especially in this vertical.
Originally Posted by erikgyepes
I'm also talking about, let's call it NET ROI, so clickloss is included already. Server costs are not a considerable amount, it's a couple 100s a month max with my setup. I'm working mostly with banner traffic, so tracker costs is not a considerable factor again. On top of that, I have to consider only the part of server and tracker expenses that is related to the particular campaign. The $ I pay to my people is fixed from a large part, so some extra work for them is not gonna affect the bottom line all that much anyways. Plus, I manage a lot of campaigns myself, then my biz partner manages some ... this doesn't affect the expenses too.
So yes, 8%-10% ROI from campaigns on autopilot is still something I will gladly take
I try to focus my energy on campaigns that make more obviously, but I always have some campaigns with such low ROI running too. As long as it's making some dough, I don't kill em
Great post as always @matuloo
On other side ... one of the advantages of running big volume even on smaller margin is the high probability to get better payouts for the offer, which will eventually raise your numbers rapidly.
Simple really.. profit buys you the bling bling affiliates love to flash, ROI is just a metric
True! ROI is a percentage, profit is money in the bank.
Buts its not that simple. Both metrics should be looked together at according to their risk profile. If you make 8% in AM, that sucks. If you make 8% on real estate, thats massive.
AM has high risk and hence needs a higher return to make it worthwhile, real estate is lower risk so an 8% return is very good.
ROI, profits and risk should be aligned and go hand in hand. You can't look at one metric without looking at the other.
Originally Posted by cbrughmans
I'm obviously on weeklies with everyone I work with, those companies have paid me many times already ... of course shit can happen, but I'm risking maybe 10 days of revenue max, as soon as I notice payment is late, I would stop traffic. I'm not saying, 8% ROI is my goal, but as soon as a campaign is still able to make that kind of return, I'm not gonna kill it. My focus is on better performing campaigns obviously, but anything that is bringing me 8%-10% per day, is still worth a few minutes of my time, anytime.How much % is your margin as a network actually? I doubt it's gonna be way higher than this, certainly not with HIGH LEVEL affiliates that send a ton of volume.
Originally Posted by cbrughmans
On top of that, with real estate, we'd be talking about annual ROI, so 8% PER YEAR!!! In AM we're talking about DAILY ROI, so this is comparing apples and oranges.
ROI for me is always on an annual basis. If I look at earnings or "how things go" I always look on an annual basis as I believe its better to work on the long term than on daily winnings.
If you invest 100K$ in traffic on a yearly basis and only make back 108K$, its really not interesting because of the risky nature of the AM business. On real estate this return would be good.
Therefore its very important to weigh returns with risk and making sure both are aligned. That being said your article is again spot on!
And bubbles are great - love them! Best moment to buy
Originally Posted by cbrughmans
If you invest 100K$ in traffic on a yearly basis and only make back 108K$, its really not interesting because of the risky nature of the AM business. On real estate this return would be good.
Therefore its very important to weigh returns with risk and making sure both are aligned. That being said your article is again spot on!
And bubbles are great - love them! Best moment to buy
Anyways, what I had in mind was that type of campaigns where I buy $1000 worth of traffic per day and my revenue is $1100, nothing spectacular, but I will keep it running anyways.
Hey great post. Makes perfect sense
You laid it out perfectly and clear to understand. Thank you!
Originally Posted by huyhoang
i am able to understand all the thing in the post thank you
Originally Posted by abhiram
If there is something else you need help with, just start a thread and ask about it
very helpfull, thank you!
Originally Posted by fb_lady
Maybe we should give the thread an automated push every now and then, the topic is always relevant.
awesome explaination @matuloo, it really goin to change my approach, thank's a lot !!!
Originally Posted by markis
!!!
Originally Posted by matuloo
At one point the profit from lower ROI on higher volume will surpass the profit from high ROI on lower volume - and then it´s all about volume
Home > >