The Future Of Digital Marketing Will Be Cohort-Driven, Not ROAS-Driven

There are two schools of thought on digital marketing. One of them doesn’t work that well anymore.

The first school of thought is ROAS-driven. ROAS = Return on Ad Spend, or the revenue you earn from a transaction minus the cost of media used to drive that transaction. 

In this school of thought, your objective is to achieve the highest ROAS possible. You want to achieve the highest return on your advertising dollar.

There are different denominations of the ROAS-first philosophy. Some use last-click analytics as their source of truth - aka the last advertising channel the customer interacted with before the sale receives all the credit. 

Others use in-platform analytics to track the ROAS of individual advertising channels over a longer period of time. For example, the default attribution window on Facebook Ads Manager is 28 days after a user clicks an ad. So any transactions that happen within that 28 day window will contribute to a campaign’s ROAS, even if the customer clicked through other channels before making the sale.

Like many schools of thought, the objective of the ROAS disciples is admirable, but it can result in perverse incentives and negative downstream effects for a business. 

There are two major pitfalls in seeking ROAS above all else:

• It will (almost) always be cheaper to win an additional sale from an existing customer than to win the first sale from a prospect.
• Campaigns featuring markdowns and promotions will always have a higher conversion rate than full price campaigns, resulting in higher ROAS all else equal. The deeper the promo, the higher the conversion rate.

Blindly pursue ROAS without a strategy to mitigate these two issues and you’ll wind up with a stagnant, promo-hungry customer file. Full price product launches will not meet your expectations and margins will erode.

All the talk you hear about “an increasingly promotional environment” in the press and within your own organization is the result of a decade of ROAS-driven digital marketing. And when your competitors inexplicably seem to avoid aggressive promotions, it is because they are managing the two potential pitfalls listed above.

The second school of thought is Cohort Driven. In this school of thought, your objective is to invest your advertising dollars in the way that will best position the business for future success. Your decisions must be profitable today AND deliver value 6-12 months from now.

A cohort is a group of customers united by some common criteria. “Every customer acquired in March 2020” is a cohort. “Every customer who bought Nike brand shoes” is a cohort. “Every customer acquired through a Facebook prospecting campaign” is a cohort.

A Cohort-Driven Marketer is looking to acquire customers that are profitable on their first transaction at a variable operating margin level, and then go on to deliver additional profit in the following 6-12 months. Cohorts allow the marketer to isolate where the “best” customers are coming from, and how business decisions impact customer behavior over time.

In Cohort-Driven Marketing, the money you spend on marketing truly becomes an investment, because you are able to make some estimate of future returns from the customers you acquire. Forecasts of future sales and inventory will become more accurate, and you’ll actually spend less money advertising markdown and promo events.

Cohort-Driven Marketers are always looking to reduce the cost of customer acquisition and retention by evaluating which investments are truly incremental. They’re not afraid to abandon a tactic, even if that tactic is a “best practice”. 

A Cohort-Driven Marketer rejects the thesis that “any customer is a good customer” and “any dollar is a good dollar”. They understand the opportunity cost of their decisions, and work to shape the future trajectory of their business.

Cohort-Driven Marketers also acknowledge and understand the role that merchandise plays in the accuracy of these forecasts, especially in a more complex, SKU-intensive business. Cohort-driven marketers build a strong partnership with merchandising and planning teams so that each team can understand the way their decisions impact one another.

Predictions:

1. In the next five years, a “GA of Cohort Analysis” will emerge. 

• There are currently no widely accessible tools for measuring cohort performance at a variable operating margin level. 
• This is probably because this approach requires standardized data inputs and a definition of “the customer” (garbage in, garbage out). These are the same challenges that businesses face during a CRM or CDP implementation, and those are usually handled by several team members with a bespoke approach.
• Shopify or another plug and play ecommerce platform vendor could lead the way here, because their data model enforces a certain level of standardization. 

2. A content and training ecosystem will develop alongside this new tool, resulting in a mainstreaming of the cohort-centric approach.

• There are very few people writing free content and training that approaches marketing from a cohort-centric POV outside of startups and recurring revenue businesses. A lot of what exists is very technical or academic.
• A more beginner-friendly content and education ecosystem will develop, in the same way that ROAS-centric content developed with the adoption of GA and SEO content developed alongside Moz and other tools.

3. We’ll see more companies looking for marketer/merchandiser hybrid roles, and performance marketers will have a seat at the table in assortment and inventory planning discussions.

4. Media and performance marketing agencies will have to go through another phase of transformation to remain relevant. In doing this, they will need to become more cross-functionally enmeshed within their clients' organizations.

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